How are my mutual funds taxed?

The mutual funds are taxed after calculating the capital gains/profits. It is to be noted that mutual funds are taxed only when they are sold. No taxation is applied for notional gains/losses. It is to be noted that a similar treatment is applicable for equity shares and equity-oriented mutual funds.

Taxation of mutual funds is based on the tenure for which they are held by the investor. They are termed short-term or long-term capital gains based on the tenure held.

For Equity funds or Equity-based hybrid funds, Less than 12 months is termed as short-term and 12 months or longer is considered as long-term.

For Debt funds or Debt-based hybrid funds, less than 36 months is considered short-term and 36 months or longer is considered long-term.


Treatment for profits/Capital Gains:

Refer to the below table for applicable tax rates on the capital gains:

Fund typeEquity funds or Equity-based hybrid fundsDebt funds or Debt-based hybrid funds
Short-term capital gains15%As per the investor’s tax slab
Long-term capital gainsGains up to Rs 1 Lakh are exempt. Any gains above Rs 1 Lakh are taxed at 10%20% with indexation benefits
Tax treatment for capital gains on selling shares or equity mutual fund units

Additional cess and surcharge are also levied upon the taxable amount.


Treatment for Capital Losses:

If your cost of acquisition is higher than the sales proceeds, it implies that you have made a capital loss instead of capital gains. Let’s understand how these capital losses are treated.

The income tax laws allow setting off these capital losses against any capital gains made. Any other type of income cannot offset them.

  • Long Term Capital Loss can be set off only against Long Term Capital Gains.
  • Short Term Capital Losses are allowed to be set off against both Long Term Gains and Short-term gains.

Albeit, if you are not able to set off the complete losses in the same assessment year, these capital losses can be carried forward for 8 assessment years since the year in which the losses were incurred.

To keep a track of your losses, the income tax department has laid out that losses for a year cannot be carried forward unless that year’s return has been filed before the due date.

Although there is a loss return, you do not have any income to show, filing the income-tax return before the due date is a must.


Disclaimer: This article is intended for informational purposes only and should not be construed as professional advice.

How are my mutual funds taxed?
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