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Taxation on Equity Mutual Funds

Tax on Equity Mutual Funds under section 111A, 112A

Last Updated 02nd Dec 2020

Sections Tax Rate
111A 15%
Section 112 A 10%
  • Under Sec 111A, short term capital gains are taxable at 15%, irrespective of your tax slab rate.
  • Long capital term capital gains up to Rs. 1 Lakh are exempted from taxes under Sec 112 (A).
  • Under Sec 112(A), a tax rate of 10% is levied on long term capital gains exceeding Rs. 1 Lakh.
  • Before budget 2018, long term capital gains were exempted from taxes under Sec 10(38) of the Income Tax Act.
INCOME TAX CALCULATOR

Taxation on Equity Mutual funds u/s 10(35)

Equity mutual funds are subject to capital gains tax depending on whether the gain on sale is categorized as short term or long term capital gains. Capital gains tax rates are same for both Resident Indians and Non Resident Indians.

Unlike debt mutual funds, there is no dividend distribution tax on distribution of dividend income on equity mutual funds.

Type of Tax Tax rate
Short Term Capital Gains Tax (under section 111A)
Resident Indian 15%
Non Resident Indian 15%
Long Term Capital Gains Tax ( under section 112 (A)]
Resident Indian 10% ( Capital gains exceeding ₹ 1 Lakh)
Non Resident Indian 10%( Capital gains exceeding ₹ 1 Lakh)
Dividend Distribution Tax Nil (as per section 115R)

What are Equity Mutual Funds?

Equity mutual fund is a type of mutual fund scheme in which a significant proportion of its assets under management is principally invested in stocks including equity stock market. They fall in the category of “Stock Mutual Funds” that are defined as funds with at least 65% of portfolio invested in equity and equity related instruments. All mutual funds, including equity mutual funds, balanced funds, sectoral funds, large cap funds, mid cap funds and small cap funds etc are categorized as equity mutual funds or stock mutual funds.

Example - large cap funds, mid cap funds, small cap funds, sectoral funds, balanced funds (equity oriented)

How is capital gains tax computed on equity mutual funds?

Capital gains arising on sale of equity mutual funds attract capital gains tax only, if the period of holding has been less than a year. Equity Mutual Funds are exempted from paying long term capital gains tax which means if you sell your holding in equity mutual fund after 1 year of holding, you will not be required to pay any capital gains tax on such transaction.

Illustration 1: Calculation of capital gains tax in case you sell a equity mutual fund before 1 year of holding

Mr. B, an Indian resident, sells his investment in equity mutual fund at ₹ 25,000 on 20th March, 2017. He had purchased the scheme at ₹ 18,000 on 15th April 2016. What will be his capital gains tax liability?

Mr. B, earns a capital gain of ₹ 7,000 on his sale transaction. Since his holding period is less than 12 months, he is liable to pay short term capital gains tax at the rate 15% which translates into a capital gain tax liability of ₹ 1,050 on this transaction

Computation of Capital Gains Tax Rs.
Selling Price of equity mutual fund 25,000
Cost of acquisition 18,000
Short Term Capital Gains 7,000
Short Term Capital Gains rate @15% 1,050

Capital gains on sale of equity mutual funds sold after 12 months of holding period is treated as long term capital gains

Equity mutual funds are exempted from paying long term capital gains tax under section 10(38) of Income Tax Act which means if you sell your holding in equity mutual funds after 12 months of holding, you are not required to pay any capital gains tax on such transaction.

How much dividend distribution tax (DDT) is charged on equity mutual funds?

Any distribution of income on equity mutual funds is completely tax free in the hands of investor. Further, there is no dividend distribution tax on equity mutual funds, which means that a mutual fund house is also not liable to deduct tax on dividends declared on equity mutual fund scheme.

Note: DDT is the abbreviation for 'Dividend Distribution Tax' which refers to the tax deducted or charged by the fund house (mutual fund company), on any divided declared and distributed to its investors.

FAQs

How are equity mutual funds taxed?

There are two factors which determine how mutual funds are taxed in India; Investment scheme and the tenure of the investments in mutual funds. Equity mutual funds that are sold within one year are taxable at 15% rate of interest and the mutual funds which are redeemed after one year are taxed at 10%. However, long term capital gains received up to ₹ 1 Lakh are not taxable.

How do equity mutual funds work?

Equity mutual funds are invested in stocks of large-cap, mid-cap, or small-cap companies as per the market conditions. Usually, investors invest a minimum of 60% of the assets in the equity shares. The rate of returns on the equity mutual funds significantly depends on the performance of the company.

Which is the best equity mutual fund?

To decide about the best equity mutual fund, you must evaluate the fund performance based on the returns on the investments. The returns for five years can be considered a typical tenure for evaluation. Other factors like risk-return ratio, fund house performance and an expense ratio of the funds must also be looked to decide about the best equity mutual fund. Axis Focus 25 Fund, ICICI Prudential US Bluechip Equity Fund and Aditya Birla Sun Life Banking & Financial Service Fund are the equity mutual funds with highest returns.

Are equity funds tax-free?

Equity mutual funds based on dividend incomes and long-term capital gains up to ₹ 1 Lakh are not taxable in India. However, other equity funds which are redeemed with one year and long-term capital gains exceeding 1 lakhs are taxable.

Are equity mutual funds safe?

Mutual funds invested in India are subject to the market risks depending on the type of mutual funds. For instance, equity mutual funds invested in equity shares are considered as the riskiest investment. However, there are certain mutual funds such as funds of government securities where you can get returns at least the principal amount of investment.

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