How are mutual funds (capital gains) taxed?

Mutual funds are great for investments – there are many different types that one can choose from.

However, taxation of mutual funds capital gains is something that most investors grapple with.

Let’s quickly have a look at how different mutual funds are taxed.

We can broadly divide all mutual funds into equity and debt. (types of mutual funds)

The following is how equity mutual funds are taxed –

All realized capital gains that are less than one year old will be taxed at 15%. This is straightforward. The realized capital gains on equity oriented mutual funds that are less than one year old are referred to as short term capital gains.

All realized capital gains that are greater than one year old will be taxed at 10% with a tax exemption on the first Rs. 1,00,000. The realized capital gains on equity oriented mutual funds that are greater than one year old are referred to as long term capital gains.

Let’s take two scenarios to help you better understand how to calculate the applicable tax on realized equity long term capital gains –

Let’s say realized equity long term capital gains are Rs. 50,000 for a financial year. In this case, you are not required to pay any taxes on the long-term gains!

Let’s say, now, realized equity long term capital gains are Rs. 1,20,000 for a financial year. In this case, the first Rs. 1,00,000 is exempted from taxation. The Rs. 20,000 over and above Rs. 1,00,000, however, will attract a 10% tax amounting to Rs. 2,000!

The following is how debt mutual funds are taxed –

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