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 type | Short-term capital gains | Long-term capital gains | ||
| Duration | Tax | Duration | Tax | |
| Equity funds | Shorter 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 |
| 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 funds | Shorter 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 |
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
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