Tax Implications of Investing In Large Cap Mutual Funds

Large cap funds can be a core part of many salaried investors’ portfolios. These equity mutual funds invest in the country’s largest companies in terms of market capitalization – those ranked between 1 and 100 on recognised stock exchanges.

These companies typically have healthy balance sheets, strong fundamentals and a track record of growth. As a result, large caps combine long-term growth potential and relative stability.

However, it’s essential for investors to know the tax implications of large cap mutual funds, because taxes can eat into real gains over time. Getting the large cap mutual fund taxation picture right, therefore, fosters both long-term compounding potential and short-term cash flow planning.

This guide explains how large cap funds are taxed, the exact rates now in force after recent budgets, and practical strategies to keep your liability in check.

• Table of contents

• Understanding taxation on mutual fund investments
• Short-term capital gains tax on large cap mutual funds
• Long-term capital gains tax on large cap mutual funds
• Dividend distribution tax and its impact
• Tax-saving strategies for large cap fund investors
• Difference in tax treatment: Large cap vs other mutual funds
• How to report large cap mutual fund income in ITR

Understanding taxation on mutual fund investments

Broadly, any money you earn from a mutual fund is taxed in one of three buckets:

• Capital gains: profits gained upon selling or switching units.
• IDCW payouts: Cash payouts made by the fund under the Income cum Capital Withdrawal plan (now taxable in your hands).
• Securities transaction tax (STT): a tiny levy deducted on redemption of units on equity-oriented funds (currently 0.01% on purchase and sale.

Large cap equity funds fall under the “equity-oriented” umbrella, so they follow the equity schedule for capital gains taxes. Remember, these three buckets can interact.

A year with high IDCW payouts, for instance, may increase your total taxable income, potentially pushing you into a higher surcharge bracket. Since surcharge is levied on total tax – including capital gains – the result could be a higher effective tax rate on your capital gains as well.

Example for illustrative purposes only.

Coordinating payout choices with your overall income map is, therefore, a basic, but often overlooked, step in tax-efficient fund management.

Read Also: Budget 2025: Complete guide to new tax structure[1]

Short-term capital gains tax on large cap mutual funds

Capital gains are simply the potential profits you make on your investment – that is, the difference between the per-unit purchase price and the sale price. For equity mutual funds, capital gains are taxable at the time of redemption. The tax rate depends on the amount and the holding period.

If you redeem units within 12 months of purchase, profits are classified as Short Term Capital Gains (STCG). Post Budget 2024, the STCG rate on equity mutual funds is 20% (from the earlier 15%.) A 4% health and education cess is also applied on this tax.

Long-term capital gains tax on large cap mutual funds

If you hold units for more than a year, profits are classified as Long Term Capital Gains (LTCG), which is taxed at a lower rate than STCG.

After the 2024 Budget, LTCG of up to Rs. 1.25 lakh in a financial year are tax-exempt. Thereon, the tax rate is 12.5%. That means the first Rs. 1.25 lakh of net long-term gains in a financial year is tax-free; anything above is taxed at 12.5% plus cess and surcharge.

Prior to this, the tax rate was 10% and the annual exemption threshold was 1 lakh.

Illustration: Assume you earned long term gains of Rs. 2 lakh. The first Rs. 1.25 lakh is exempt; the remaining Rs. 75,000 is taxed at 12.5%, or Rs. 9,375 (plus cess/surcharge). Your effective rate on the total gain is only 4.7% - dramatically lower than STCG. *Example for illustrative purposes only.

Dividend distribution tax and its impact

The Dividend Distribution Tax (DDT) was abolished in FY 2020-21. Since then, any payouts made under the IDCW plan (earlier called dividend plan) by mutual funds are taxable in the hands of the investor at their slab rate.

However, funds now deduct a 10% TDS on dividend payouts exceeding Rs. 10,000 per year.

Read Also: Budget 2024: Mutual Fund Capital Gains Tax Changes Explained[2]

Tax-saving strategies for large cap fund investors

• Stay invested for at least 12 months to qualify for the favourable LTCG rate.
• If some of your equity funds are showing a loss, you can sell them to “book” those losses which can offset gains elsewhere, lowering net taxable income. This is called tax loss harvesting.
• Try to keep potential gains within the Rs. 1.25 lakh exemption threshold. You can spread exits across financial years.
• Invest some portion every year in ELSS mutual funds or other schemes that qualify for tax deduction under Section 80C of the Income Tax Act, 1961, under the old regime. This can reduce your annual taxable income by up to Rs. 1.5 lakh.

Difference in tax treatment: Large cap vs other mutual funds

All equity-oriented mutual funds are taxed in the same manner as large cap funds. Hence, there is no difference in taxation rules for equity-oriented mutual funds (funds that invest 65% or more in equities). For debt mutual funds (investing less than 35% in equities), all capital gains on units purchased after April 1, 2023, are deemed STCG regardless of the holding period and taxed as per the investor’s tax slab.

How to report large cap mutual fund income in ITR

• In case of capital gains, use ITR-2 (individuals) or ITR-3 (business income).
• Enter IDCQ payout income under “Income from Other Sources > Dividend”.
• To report capital gains in ITR-2, you have 2 options:
  • Report each redemption in Schedule 112A (equity-oriented units) with ISIN code, name & number of units, cost and other required details.
  • Calculate capital gains for each transaction and enter aggregate amount directly in CG Schedule.
• Cross-check with the Annual Information Statement (AIS) to avoid mismatches.
• Retain PDF copies of contract notes for three assessment years (the current audit window per the Income Tax Act) to defend cost-basis claims if queried.

Conclusion

Large cap mutual funds combine the relative stability of established companies with long-term growth potential. While recent budgets have nudged rates higher, investors can still reduce tax outgo by holding on to units for at least a year and planning their redemptions such that capital gains remain within the Rs. 1.25 lakh exemption limit. Treat taxes as a controllable variable, not an afterthought, and your large cap investments can potentially compound over the long term with minimal tax leakages.

FAQs:

What is the tax rate on large cap mutual funds in India?

STCG on units held ≤ 12 months is taxed at 20%, whereas LTCG on holdings > 12 months is 12.5% for gains exceeding Rs. 1.25 lakh.

Are dividends from large cap mutual funds taxable?

Income from mutual funds is no longer called a dividend – it is called Income Distribution Cum Capital Withdrawal payouts. These payouts are added to your income and taxed at your slab rate. Additionally, there is a 10% TDS on payouts above Rs. 10,000.

How is LTCG calculated on large cap funds?

LTCG is calculated by subtracting the purchase NAV from the sale NAV, multiplying the result by the number of units sold. After applying the Rs. 1.25 lakh annual exemption, the remaining gain is taxed at 12.5% plus cess.

Can I save tax by investing in large cap mutual funds?

There are no tax benefits or deductions on large cap fund investments, but you can lower tax by holding units for at least a year, staying within or close to the exemption limit, and loss-harvesting to offset other gains.

How do I report mutual fund gains in my income tax return?

Use ITR-2/3 depending on your income type, declare IDCW payouts under “Income from Other Sources”, fill the required capital gains details and reconcile data with your AIS to avoid discrepancies.