Taxes on Mutual Fund - In India

Tax on the Indian mutual fund is divided into Two categories

  • Tax on Equity Mutual Fund
  1. If the investment is done for more than 1 year before withdrawal, then it will fall under Long Term Capital Gain. The tax will be 10% on the profit exceeding Rs-1 lakh.
  2. If the investment is done for less than 1 year before withdrawal, it will fall under Short Term Capital Gain. The tax would be flat 15% on the profit.
  • Tax on Debt Mutual Fund
  1. If the investment is done more than 3 years before withdrawal, it will fall under Long Term Capital Gain. The tax would be 20% on the profit after indexation (indexation consider inflation and hence the effective tax will be less than 20%).
  2. If the investment is done less than 3 years before withdrawal, it will fall under Short Term Capital Gain. The tax would be deducted according to your tax slab.
Note: If the mutual fund has more than 65% allocation in equities, it will fall under equity mutual fund.




Let’s first understand the tax on equity mutual fund-

Case 1 - One-time buying

a) Selling the equity mutual fund after 1 year.
  • If You have invested Rs 10 lakh in equity mutual fund. Now, if you sell it after 1 year, you will have to pay a Long Term Capital Gain (LTCG) tax of 10%.
  • Let’s consider one has sold the mutual fund after 1 year and 1 month. In this case, he fall under LTCG category.
  • If at the time of selling his total investment value has became say Rs 13 lakh then he will have to pay 10% tax on profit minus 1 lakh i.e. Rs 3 lakh (profit) - 1 lakh = Rs 2 lakh.
  • 10% of 2 lakh is Rs 20,000. Hence his total tax is Rs 20,000.
b) Selling the equity mutual fund before 1 year.
  • Now let’s say one has invested Rs 10 lakh and after 9 months he sold his holdings and at the time of selling the investment value has became say Rs 11.5 lakh. Then he will have to pay a Short Term Capital Gain (STCG) tax of flat 15% on the profit.
  • This means 15% of 1.5 lakh = Rs 22,500 as tax.

Case 2 - SIP Investment
  1. Let's say you have started a SIP of Rs 10,000 on 5th April 2018 in an equity mutual fund. This SIP is applicable on the 5th of each month.
  2. Now let’s assume that the NAV of that mutual fund on 5th April 2018 was Rs 20 and till June 2019 it became Rs 46.
  3. You have invested for 15 months (Rs 10,000 each month).
  4. On 5th April 2018, you bought 500 units (10,000/20), 5th May 2018 = 454.5 units (10,000/22), etc. (as shown in below table)
  5. The total units purchased till June 2019 would be 4657.9 and NAV in June 2019 is 46. Hence total investment value would be Rs 2,14,262 (4657.9*46)

Now let's say you want to sell mutual fund worth 1 lakh
  1. Total mutual fund units to sell = 2173.9 (1,00,000/46) - Amount/NAV
  2. Now when did you purchase a total of 2173.9 units? You purchased them by September 2018.
  3. Since the units purchased in April, May and June have completed 1 year, you will have to pay 10% tax (after rebate on profit up to 1 lakh) on 1339.2 units (purchased till June).
  4. Rest of the units are purchased within 1 year and hence you will have to pay flat 15% tax on profit. Units purchased 2173.9–1339.2 = 834.8 Units.
  5. Amount paid to purchase 1339.2 units till June = Rs 30,000
  6. Investment value on 1339.2 units (purchased more than 1 year ago) = Rs 61,601 (1339.2*46).
  7. Profit = 61,601–30,000= Rs 31,601.
  8. Tax to be paid = 0 (This is because in LTCG after 1 year, you don’t have to pay tax till the profit of 1 lakh and profit on long term units is Rs 31,601.)
  9. Now, the amount paid to purchase rest of the 834.8 units= Rs 20,000 for July and August and Rs 2,011 in September. Total amount paid= Rs 22,011.
  10. Profit on the remaining units purchased within 1 year =Rs 38,398–22,011= Rs 16,387. Tax = 15% of 16,387 = Rs 2,458.
  11. Hence, the total tax paid on withdrawal of Rs 1 lakh would be Rs 2,458.
If you sell all the units after June 2020 and the NAV during selling is 51. Your total investment value would be Rs 2,37,551 (4657.9*51). You invested a total of Rs 1,50,000. Hence your total profit would be Rs 87,552. Since this is a long term capital gain as all your investments are over 1 year, your total tax would be Rs 0 because there is a tax rebate up to a profit of 1 lakh in long term capital gain from equity mutual fund.

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