Investors can get returns from mutual funds investments in the form of dividends or capital gains.

Dividends

Mutual fund investors receive dividends if they have opted for a scheme with a dividend payout option. Dividends are taxed as per the investor’s applicable income tax slab.

Capital gains

Investors earn returns in the form of capital gains when they sell mutual fund units at a NAV higher than the purchase price. Both dividends and capital gains are taxable. Below is the tax liability on capital gains for different types of mutual funds as per the changes in Union Budget 2024.

Equity Funds

What are equity funds?

Any fund which has more than 65% invested in equity. For example, small-cap funds, large-cap funds, balanced funds (equity-oriented), etc.

Stocks and Equity Oriented mutual funds
	Individuals
Long-term capital gains tax	12.5% on gains above ₹1.25 lacs
Short-term capital gains tax	20%

Mutual fund units sold after one year are categorized as long-term investments and taxed under long-term capital gains tax rules. Up to ₹1.25 lacs of consolidated long-term gains are exempt, with the remaining taxed at 12.5%. Units sold within one year are categorized as short-term investments and taxed at 20%.

What are non-equity funds? Funds whose equity investment percentage is less than 65%. E.g.: liquid schemes, debt schemes, etc.

Non-Equity mutual funds
	Individuals	NRIs
Long-term capital gains tax	20% (with indexation)and 10% (without indexation)	Listed 20% (with indexation)Unlisted 10% (without indexation)
Short-term capital gains tax	Based on individual’s tax slab

Indexation means adjusting the cost of purchase as per the inflation index number which is released by the government every year.

Indexation Example: Indexation adjusts the purchase cost according to the inflation index. For example, if you purchased a unit at ₹50 in 2012-13 and sold it at ₹100 in 2018-19, with a cost inflation index of 200 (2012-13) and 280 (2018-19), the indexed cost of acquisition would be ₹70. Thus, the capital gain post-indexation would be ₹30 (instead of ₹50), with a 20% tax applied to this adjusted gain.

Off-setting rules,

• In both cases, capital loss cannot be offset against any income head.
• Long-term capital loss can only be offset against long-term capital gains
• Short-term capital loss can be offset against both short-term or long-term capital gains

Note: The information above is applicable under the current taxation rules and could be subject to changes. Do consult a chartered accountant (CA) before filing your IT returns. For more information click here.