Understanding the tax implications on equity mutual funds

equity mutual funds taxation
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Taxation is a crucial aspect to consider when investing in equity mutual funds. Understanding the implications of taxes on your investments is essential for making informed financial decisions that can help you meet your objectives.
Here, we will shed some light on the details of taxes levied on equity mutual funds. We will also explore the different types of taxes applicable – such as capital gains tax and Income Distribution cum Capital Withdrawal (IDCW), and how they can impact your investment returns.
By gaining a clear understanding of the tax implications on equity funds, you can effectively plan and optimize your investments to achieve your financial goals. But first, let’s have a quick look at what is an equity fund.

What are equity funds?

An equity fund is a type of mutual fund that primarily invests in stocks, aiming to generate relatively better returns over the long term. These funds can be categorized based on company size (large-cap, mid-cap, or small-cap), investment style (growth or value), or market sector (technology, healthcare, etc.).
Investing in equity funds offers exposure to a diversified portfolio of companies, mitigating the risk associated with investing in individual stocks. The performance of these funds is tied to the fortunes of the companies they invest in, making them susceptible to market volatility.
Despite the inherent risk, equity funds have the potential to offer long term returns, especially for long-term investors who can withstand short-term market fluctuations. They can be a vital component of a balanced portfolio, particularly for those seeking to build wealth over time.

Different taxes on equity mutual fund

Here are the types of equity mutual funds taxation:
Income Distribution cum Capital Withdrawal or IDCW
IDCW means the distribution of income of a mutual fund scheme, which may include both dividends paid by stocks and capital gains earned by selling underlying stocks from the scheme portfolio. Income received by the investor as IDCW is added to their gross taxable income and taxed according to the income tax slab rate of the investor. In addition, there is also a standard TDS rate of 10% on dividend income more than Rs.5,000.

Capital gains tax
This tax is applicable when investors sell their mutual fund units at a profit. The rate of taxation depends on the type of mutual fund and the holding period:

For equity funds, which have more than 65% of the total fund amount invested in equity shares of companies, short-term capital gains (holding period less than 12 months) are taxed at a flat rate of 15% (plus applicable surcharge + 4% cess), irrespective of the investor's income tax bracket.
Long-term capital gains (holding period 12 months and longer) up to Rs.1 lakh per year are tax-exempt. Any gains exceeding this limit attract a long-term capital gains (LTCG) tax at a rate of 10% (plus applicable surcharge + 4% cess), without the benefit of indexation.

Factors impacting tax on equity mutual funds in India

In the dynamic financial landscape of India, several factors can influence the tax on equity funds. Let’s examine them:

  • Holding period: The duration for which you hold equity mutual fund units directly affects the tax treatment. Therefore, long-term and short-term capital gains are taxed differently.
  • Type of mutual Fund: Equity mutual funds are classified into different categories based on their investment objectives and underlying assets. Different tax rules apply to equity-oriented funds, and equity-linked saving schemes (ELSS) that come with a lock-in period of 3 years.
  • Capital gains: A profit made from selling a capital asset for a higher amount than its purchase cost is referred to as a capital gain. The capital gains you earn over time also influence the tax of equity funds.

Tax planning strategies for equity mutual funds

When it comes to managing your equity mutual fund tax, there are a few key aspects to consider:

  • Stay consistent: The duration for which you hold your equity mutual fund units can impact your tax liability. Avoid frequent buying and selling of equity fund units and consider them as long-term investments.
  • Opt for SIPs: SIPs provide a disciplined approach to investing in equity mutual funds. While each SIP instalment is considered a separate investment, the tax implications are determined basis the holding period of individual units. Thus, if you start an SIP, each instalment will have its own holding period, impacting the tax treatment accordingly.
  • Annual limit: Keep in mind that the annual upper limit for tax exemption on long-term capital gains is Rs.1 lakh. You can consider maximising the use of this limit effectively by selling units of equity funds that do not meet your expectations.

Taxation is a significant factor to consider before investing in equity mutual fund investments. By comprehending the different types of equity mutual funds taxation, including capital gains tax and IDCW, you can make informed decisions and manage your investments more effectively. Factors such as the holding period and the capital gains can impact the tax liabilities associated with equity mutual funds in India. By staying informed and proactive about tax implications, you can navigate the complexities and make the most of your equity mutual fund investments. You can consider seeking the help of a tax advisor for an in-depth understanding of the tax implications on your investments.


Are equity oriented mutual funds taxable?

Yes, equity oriented mutual funds are taxable in most cases. Long term capital gains on equity funds held for more than one year are taxed at 10% plus applicable cess and surcharges. Short-term capital gains on equity funds held for less than one year are taxed at the individual’s applicable income tax slab rate.

What is the tax exemption on equity mutual funds?

Equity funds held for more than one year are eligible for long-term capital gains tax exemptions. Gains up to Rs.1 lakh are exempted from tax.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.