05:22 pm
What’s the story
When you sell a mutual fund, you may have to pay capital gains tax, just like any other financial asset.
The amount of tax you owe depends on two main factors: the type of mutual fund (equity or debt) and the holding period (short-term or long-term).
Here is a breakdown of capital gain rules based on different categories of mutual funds.
Tax implications
Capital gains tax on equity mutual funds
Equity mutual funds are those that invest 65% or more of their assets in equities.
If you sell these units within a year of buying them, the gains are taxed at 20%.
However, if you hold them for over a year, the tax is levied at 12.5% on gains exceeding ₹1.25 lakh in a financial year.
Expert opinion
Clarifying long-term and short-term gains
Shefali Mundra, a tax expert at ClearTax, clarified the tax structure for equity-oriented funds.
She said, “For equity-oriented funds, short-term gains (held for less than 12 months) are taxed at 20% and long-term gains (held for longer than 12 months) are taxed at 12.5% above the ₹1.25 lakh exemption.”
This clearly distinguishes between the two types of capital gains on these investments.
Tax structure
Capital gains tax on debt mutual funds
Debt mutual funds, also known as income funds, mainly invest in bonds or other debt securities.
According to SEBI‘s categorization of mutual fund schemes, these funds are called ‘specified mutual funds’ for taxation purposes.
Under Section 50AA of the Income-tax Act, a specified mutual fund is defined as one where not more than 35% of its total proceeds are invested in equity shares of domestic companies.
Tax on sale of debt mutual funds
The tax on selling debt mutual funds depends on when they were bought.
For funds bought before April 1, 2023, a 12.5% tax is levied if units are sold two years after purchase.
However, short-term gains (sold in less than two years) are taxed as per the normal slab rates.