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income tax on mutual funds

Income Tax on Mutual Funds (2023 Guide)

Mutual funds are one of the most popular investment options because it helps you reach your financial goals. Mutual funds are also a tax-efficient way to invest. Investing in fixed deposits is a major drawback, especially if you fall under the top income tax rate, as interest is added to your taxable income and taxed at your income tax rate. Mutual funds work better here.

If you are Investing in mutual funds provides professional money management and tax-efficient returns. Here you will learn about income tax on mutual funds. Let’s dive into it.

How Much Taxes Do You Pay on Mutual Funds

Profits from investments in mutual funds are taxable like all other investments in the asset class. Therefore, before investing in mutual funds, you should understand exactly how your returns will be taxed. By learning about mutual fund taxation, you can plan your investments accordingly and save all your taxes. In some cases, you can even claim a tax credit. So, when you are investing, be aware of the tax on mutual fund rules.

The minimum holding period for long-term capital gains in equity funds is 1 year. Short-term capital gains of equity funds (if the shares are sold before 1 year ) are taxed at the rate of 15% plus 4%. The long-term capital gains tax for equity funds is 10% + 4% cess. Long-term capital gains up to Rs 1 Lakh are completely tax-free.

Dividends paid out by equity funds are tax-free for investors, but AMC pays an 11.648% dividend distribution tax (DDT).

How Do I Avoid Paying Taxes on Mutual Funds

No, you cannot avoid capital gains tax. Instead, you can plan your investments accordingly to get better tax savings. For example, taxes applicable to short-term capital gains are higher than long-term capital gains. Therefore, it is necessary to understand the types of taxes imposed on the mutual fund system.

Mutual funds, also known as equity-linked savings schemes (ELSS), are excellent tax savings under Section 80C of the Income Tax Act of 1961. ELSS is a diversified equity fund that tracks the stock market. A mutual fund that invests money in stocks and stock-related securities.

ELSS has a 3-year lock-in period, so you must keep your funds in these funds for at least 3 years. And the longer you hold your investment in these funds, the more likely you are to make money.

It is permitted to invest up to Rs. 1.5 lakh in tax-saving funds. A tax credit of up to Rs. 1.5 lakh is available under section 80C of the income tax act.

The best way to invest in ELSS funds is through his monthly SIP (Systematic Investment Plan). The minimum investment by SIP is up to Rs 500 per month.

At the beginning of each year, calculate the statutory deductible and the rest of the Rs 1.5 lakh limit. Divide this amount by 12 to determine the SIP amount.

Is Tax Automatically Deducted from Mutual Funds

For both equity and debt mutual funds, there is currently no way to reduce the capital gains tax on short-term returns. Therefore, if you book short-term debt fund gains, you must pay capital gains tax at the slab rate.

Short-term profits from equity funds are also taxable. Therefore, if you redeem your stock investment before the one-year period is up, you will have to pay a capital gains tax of 15 on your earnings.

For debt mutual funds, long-term capital gains automatically qualify for indexation benefits. This automatically reduces your tax burden. Therefore, in a debt fund, you only have to keep investing for more than 3 years and the index benefits apply to the redemption.

Which Mutual Funds Are Tax Free

From ELSS dividends funds are tax-free during the investment period. Profits from the sale of ELSS Fund shares are considered long-term capital gains and are tax-free.

Frequently Asked Questions (FAQs):

Is SIP maturity amount taxable?

SIP is one of the best tax-saving tools that can give you a big return on your investment. You can ask for a deduction of up to Rs. 1.5 lakh taxable income for investment in ELSS via SIP under Section 80(C) of the Income Tax Act of 1961

Are all mutual funds tax-exempt?

Selling equity fund shares can provide long-term capital gains after a holding period of one year or more. These capital gains of up to Rs 1 lakh per year are tax-exempt. Long-term capital gains in excess of this limit are subject to a 10% LTCG tax and do not benefit from indexation.

Is a mutual fund taxable income?

If you hold shares in a taxable account, you will have to pay taxes on the distributions from your mutual fund.


Now, you have got to know about income tax on mutual funds. The longer you hold shares in a mutual fund, the greater the tax savings. Taxes on long-term capital gains are relatively lower than those on short-term capital gains.

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