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Mutual Funds and Capital Gains Taxation.

January 19, 2022
in Tax
tax

The capital gains tax rate for mutual funds is determined by the holding period and mutual fund category. The holding period refers to how long an investor kept the mutual fund units.  The holding period is the timeframe between the buying and selling of mutual fund units, in simpler words. 

The rates of Capital Gains Taxation of Mutual Funds in summarized below:

Fund typeShort-term capital gains Long-term capital gains 
DurationTaxDurationTax
Equity fundsShorter than 12 months 15% + cess + surcharge12 months and longer Up to Rs 1 lakh a year is tax-exempt. Any gains above Rs 1 lakh are taxed at 10% + cess + surcharge 
Debt funds Shorter than 36 months Taxed at the investor’s income tax slab rate 36 months and longer 20% + cess + surcharge 
Hybrid equity-oriented fundsShorter than 12 months 15% + cess + surcharge 12 months and longer Up to Rs 1 lakh, a year is tax-exempt. Any gains above Rs 1 lakh are taxed at 10% + cess + surcharge 
Hybrid debt-oriented funds Shorter than 36 months Taxed at the investor’s income tax slab rate 36 months and longer 20% + cess + surcharge 
Rates of Capital Gains Taxation of MF

Taxation of Capital Gains on SIPs.

Let us understand this with the help of a simple illustration.

Mr. A purchases a certain number of mutual fund units through every SIP installment. The redemption of these units is processed on a first-in-first-out basis. He invested in an equity fund through a SIP for one year and later decided to redeem his entire investment after 13 months.

In this case, the units purchased in the first month through the SIP are held for the long-term (over one year) and Mr. A realized long-term capital gains on these units. If the long-term capital gains are less than 1 lakh, then he need not have to pay any tax.

However, Mr. A made short-term capital gains on the units purchased through the SIPs from the second month onwards. These gains are taxed at a flat rate of 15% irrespective of his income tax slab. He will have to pay the applicable cess and surcharge on it.

Conclusion: The longer you hold your investments, the more tax efficient it is.

Written by: CA Sourav Agarwal

To learn more, get our Journal: PW Insider for FREE!

For more information, reach us at [email protected]

Team, MyGoalMySip.

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    About Us

    MyGoalMySip is an Online Mutual fund investment platform powered by Prudent Wealth. As an investor, it might be hard to find the perfect investment opportunity; therefore, we’re here to help you make an informed decision.

    Our goal is to educate people and make them financially literate, and at the same time guide you in your investment journey, in short MyGoalMySip is your investment buddy.

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