Mutual Fund Taxation in India

By
Hemant Beniwal
156

There are very few things in this world which are both “Legal” & “Lethal”. TAX is one of them. If not understood or paid in a proper way, it is enough to give you hypertension which is one of the most common reasons for a heart stroke. See, I made you look gloomy and stressful. Hence it is very important to have elementary knowledge of Tax Provisions.

I believe most of the readers are new to the Mutual Funds so they will have many queries on taxation of Mutual Funds. So, here is an attempt to cover Mutual Fund Taxation for individuals, HUF & NRIs.

Income from Mutual Fund can be divided into 2 parts Capital Gain (increase in value of your investment) or dividends that investors receive on regular intervals if they have opted for dividend plans. So taxation of Mutual Funds in India can be divided in 2 parts Capital Gain & Dividends.

Capital Gain Taxation on Mutual Funds

Capital Gain is appreciation in the value of asset – if you buy something for Rs 1 Lakh & sell it for Rs 1.5 Lakh, you have made a Capital Gain of Rs 50000. Capital Gains are further divided into short term & long term depending on their investment horizon.

Short term capital Gain arises if investment is hold for less than 1 year or in simple words sold before completion of 1 year. Here 1 year means 365 Days.

Long Term Capital Gain arises if investment is sold after 1 year.

Mutual Fund Capital Gain Tax further depends on which type of fund it is – Equity or Debt.

Must Read – 11 Unusual ways of smart tax planning 

Capital Gain Tax on Equity Mutual Funds

Equity Mutual Funds are those funds where equity holding is more than 65% of the total portfolio so even balanced funds will be categorized in Equity Funds. Fund of Funds (mutual funds which invests in other funds) & international funds (funds which have more than 35% exposure to international equities) will be kept under debt category for tax purpose.

Long Term Capital gain on Equity Mutual Funds – if you buy & hold an equity Mutual Fund for more than 1 year, there will be NIL Tax. Eg. If you invest Rs 1 lakh in XYZ Fund & after 1 year, its value is Rs 1.3 Lakh – there will be zero tax on capital appreciation of Rs 30000. This is a very big advantage of equity mutual funds.

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Short Term Capital gain on Equity Mutual Funds – if you sell equity mutual fund before completion of 1 year you need to pay tax of 15% on capital gains. In the above example where gain was Rs 30000 – if this was a short term capital gain, investor would have paid Rs 4500 as short term Capital Gain.

Note for NRIs – Same capital gain is applied for NRIs but in case of Short Term Capital Gain there will be a TDS (tax deducted at source). Which means Tax will be deducted by Mutual Fund Company before paying redemption (sell) amount.

Capital Gain Tax on Debt Mutual Funds

All other funds which will not qualify as equity fund, including Fund of Fund & international Fund will be part of debt mutual funds. Definition of Short Term & Long Term is same as mentioned in equity category.

Short Term Capital gain on Debt Mutual Funds – any short term capital gain that arises due to selling of debt fund before 1 year will be added to investor’s income. Once it is added to income it will be taxed according to tax slab of that individual.

Long Term Capital gain on Debt Mutual Funds – here taxation depends on whether investor would like to use indexation or not. (To understand more on indication read this article – Taxation on Fixed Maturity Plans.

  • Without Indexation – 10% tax on capital gains
  • With Indexation – 20% tax on capital sains

Note for NRIs – NRIs will receive their redemption amount only after tax:

  • Short Term – 30% TDS
  • Long Term – 20% TDS
  • Cess of 3% will also be applied to this TDS.

Shailesh asked couple of questions regarding capital gain taxation on mutual funds – hope this will help you to understand the concept better:

“I know that some short term as well as long term tax need to paid on redemption of mutual fund, but I don’t know where to pay and how much to pay.

Can you please take following scenario and help me out to calculate tax?
Suppose my salary income is Rs. 8,50,000 per annum, I am in 20% tax slab. Apart from that only mutual fund income is there.

1. I have purchased Equity mutual fund Rs. 10000 on 20-04-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year?

Ans. Here Long Term Capital Gain on Equity is applied – So NIL tax.

2. I have purchased Equity mutual fund Rs. 10000 on 20-04-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year?

Ans. Here Short Term Capital Gain on Equity is applied – So 15% tax on gains or Rs 150.

3. I have purchased Debt mutual fund Rs. 10000 on 20-04-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year?

Ans. Here Long Term Capital Gain on Debt is applied – So 10% tax or Rs 100 (I am assuming that Indexation is not used).

4. I have purchased Debt mutual fund Rs. 10000 on 20-04-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year?

Ans. Here Short Term Capital Gain on Debt is applied – so appreciation of Rs 1000 will be added to your income tax & taxed according to your slab.

5. I have purchased hybrid mutual fund(say HDFC Balanced) Rs. 10000 on 20-04-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year?

Ans. As I told you earlier that balanced funds or funds with more than 65% in equities are qualified as Equity Funds – so answer will be same as question 1.

6. I have purchased hybrid mutual fund(say HDFC Balanced) Rs. 10000 on 20-04-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year?

Ans. Same as Question 2”

Hope now you have clear idea about capital gains. Let’s see second part of income from mutual fund – that is Dividend Income.

Mutual Fund Dividend Taxation

Again this taxation will depend on which type of Mutual Fund you are investing in – Equity or Debt.

There is no dividend distribution tax on equity mutual funds & also the dividend received by investors is tax free. So, again a bonus for equity mutual fund investors.

Even in case of Debt Mutual Funds – dividends received by investor are tax free in their hand or they don’t need to show it as a taxable income. But there is dividend distribution tax paid by mutual funds to income tax department.

Dividend Distribution Tax on Debt Mutual Funds

Here there are many tax slabs depending on the investor category but we will only be talking about Individuals, HUF & NRIs.

This taxation further depends on type of Debt Funds:

Dividend Distribution Tax on Liquid/Money Market Schemes

Liquid/Money Market Schemes means Debt oriented funds which invest in money market instruments or in securities that have maturity of less than 90 days.

Here 27.038% tax (25% Tax + 5% Surcharge + 3% Cess) will be deducted from the dividends.

Dividend Distribution Tax on Debt Funds other than Liquid/Money Market Schemes

Here 13.519% tax (12.5% Tax + 5% Surcharge + 3% Cess) will be deducted from the dividends.

In equity mutual funds there is not much difference whether you invest in a growth or dividend option.  (Leaving 2-3 special cases) In debt it is very important that investor should select dividend or growth depending on his time horizon & tax slab.

According to the Finance Bill 2013, the DDT applicable for debt funds has increased from 12.5 per cent to 25 per cent for individuals and HUFs. DDT applicable to any person other than an individual or HUF i.e. a firm, or a company, continues to be 30 per cent.

If you still have any query related to Mutual Fund Taxation – feel free to ask. If you think this article was helpful to understand this concept, must share it with your friends.

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156 COMMENTS

  1. Hi Hemant
    Very useful post. I have one doubt regarding tax with indexation and without indexation. You have mentioned
    Long Term Capital gain on Debt Mutual Funds – here taxation depends on whether investor would like to use indexation or not.
    With Indexation – 10% tax on capital sains
    Without Indexation – 20% tax on capital gain
    I think here 10% and 20% need to be interchanged.

  2. Hi
    I had invested in Liquid Fund (Growth option) and had sold it after 3 months. Can you clarify if this gain will be added to my taxable income? I was under the impression that this would be exempt from taxation (based on another blog site).

    Regards,
    Santy

    • Hi Santy,
      Yes, it will be included in your income if you will redeem it before completion of 1 year. If you would have gone for Dividend Reinvestment – in that case there was chance that you don’t need to pay tax.

  3. ok. If I redeem equity diversified MF before completion of 1yr, I pay tax on the gain, if any. What if I am redeeming at loss. Does the loss amount get deducted from my net taxable income for that year?

    • Hi Kannan,
      Short term loss can be adjusted with short term & long term gains. If you don’t have gains to adjust – you can carry forward the losses for 8 years.

      • put some light on capital loss carry forward , if some one have a short term capital loss 2 years back in mutual funds ( equity / debt mutual fund ) , can he adjust those losses against mutual fund ( equity /debt if differ pls explain) this year by having capital gain this year . i think capital gain arising from any source can be same , equity / debt doesnt make difference? it quite urjent ,, reply soon

  4. There are certain FMPs which have tenure less than a year, what type of tax will be applicable to such FMP’s

    • Hi Rajesh,
      If you go for growth plan – appreciation will be included in income. If you go for dividend plan – dividend distribution tax will be deducted & you may not need to pay any tax.

  5. Dear Mr. Hemant, Thank you very much for this important information. In fact, I am taken throughout the day today while going through various articles !
    Thanks again for the valuable knowledge awake thru’ this !

  6. Thanks Sir,
    It is really a valuable information for me. I just raised a doubt, need a clarification on this. Kindly tell me that
    In Equity linked MF – dividend distribution tax is paid by MF companies & in Debt linked MF- dividend distribution tax is paid by Individual himself.

  7. hi Hemant ji,
    I m so much confused now with my mutual fund investment,
    I have 15 lakhs in equity since 4 years now and i don’t want to redeem it now,
    since i don’t need it now, it is for my retirement only,
    how much tax will I pay after 5 more years?
    Should i keep it invested or should I redeem it and reinvest it again in SIP.
    Waiting for your advice.

    • Hi Tony,
      I believe there are 2 questions – first on taxation & second on investment. I am assuming that your investments are in equity mutual funds – currently there is no long term capital gain tax in equity mutual funds. If you sell it today or if you sell it even after 5 years there is going to be no tax. Things may change or remain same after new direct tax code but still it is not clear.
      Coming to your second question – if you are happy with your fund selection stay invested. There is no need to redeem it & again invest it through SIP or STP at these levels of market.

      • Hi, I got stuck in a Mutual Fund for 6 years, price did not increase, and I finally took the money out of it this year with a loss of just 2%. Can I use this investment at par as ELSS, and show it as long term investment just as FD – in my current financial year? as I had invested in this MF for more than. (My investment was in Equity fund) ?/ thanks for your response in advance. Rgds, Aakash

        • Hi Akash,
          ELSS is altogether a different category – you can’t claim tax benefit by investing in any other Mutual Fund. You are also talking about taking benefits on something that you invested 5 years back – this is not possible with any product.

  8. Thanks so much, you really took my worries off me, and yes they are all in equity
    my next step is to diversify and include some debt instrument in it
    my asset allotment is like this-
    shares- 15%
    equity MF – 60%
    FMP – 15%
    Gold – 10%
    What do you think about my allotment.
    One thing I want to share with you, this is all because of your site-TFLGUIDE
    I want to thank you from the bottom of my heart
    Happy and bright new year for you, your family and all our loyal followers of TFL, may God bring happiness to everyone’s life financially.
    regards and best wishes for your GREAT work to make common people
    financially literate.

  9. The HDFC Balanced Fund (G) has 55% portion in Equities.
    So would it still qualify for Equity Fund? As you said the Equity % has to be greater than 65%.
    So what will happen in this case?

    • Hi Sagar,
      I thin even HDFC balanced is having 65% in equity – can you share where you read it is 55%

    • Hi Parag,
      Dividends from mutual funds – be it equity or debt are tax free in hand of investors including NRIs.
      If you like TFL must share it with your friends 🙂

  11. I have received money form ICICI prudential mutual fund on Maturity.
    Please help me about their tax treatment.
    Thanks and regards_
    Bibhuti sningh

  12. hi, how does one find out tax liability in case the liquid or debt fund is being used as feeder fund for stp s

    • In my view switch is regarded as redemption and taxed accordingly either asSTCG or LTCG.

  13. Hi Hemanth,
    Enjoyed reading your article and learnt a lot about MF taxation. Thanks for sharing. However, I have a query: –
    Would I be right in saying: In order to save tax, if I am investing in Debt MFs I should opt for dividend rather than growth option? The dividend income is tax free whereas capital gain is taxable.

  14. HI HEMANT.
    I HAVE A SPECIFIC QUERRY REGARDING DIVIDEND REINVESTMENT OPTION IN DEBT FUND SPECIALLY REGARDING DIVIDEND STRIPPING.
    CAN YOU CLARIFY REGARDING THE DIVIDEND STRIPPING CLAUSE OF DEBT MUTUAL FUNDS. IF YOU CAN EXPLAIN WITH AN EXAMPLE.
    THANKS
    TAPAN .

    • Hi Tapan,
      Dividend stripping is history now as MF can declare dividends only 5 days before the dividend date.

      • hi hemant,
        pl explain the provision of Sec 94(7) WITH a help of an example.
        thanks
        tapan.

  15. Hi,

    If i am investing in the HDFC Cash management fund treasury option- Daily dividend reinvestment would i be required to pay any tax?

    My understanding is that what ever dividend is being given to me is not taxable. The dividend being reinvested will be treated like a fresh investment.
    Since the NAV of this fund is constant @ 10.03 whenever i exit whether short term or long term there is going to be no taxation.

    Please clarify.

  16. Thanks Mr Beniwal for the useful info in your article.

    I have a query: What is “double indexation”?

    Regards,
    U Mahapatra

  17. Hi,
    I have invested in HDFC Prudence Fund Growth for SIP tenure of 3 years with last premium paid on August 2011. Now @ April 2012 if I wish to completely redeem, would it attract any TAX.

    • This fund comes under equity MF category so any gain from selling within a year of purchase will qualify for short term capital gain. Any gain from selling after one year of purchase will not attract any tax.

      Based on the above whatever you purchased between Apr 2011 to Aug 2011 could attract 15% tax [applicable for STCG] if there any gain from selling those units. Better sell everything in Sep 2012 unless of course you need the money now.

  18. Hi,
    I invested in templeton India low duration debt fund with monthly dividend option.
    From reading the blog I understand the dividend is tax free in my hands.
    But after the dividend, the NAV of the fund fell. Now if I exit, I will have short term losses. Could you please explain what is the tax treatment for these short term losses?
    Thank you,
    Satya

    • Hi Satya,
      Short Term Losses can be set off with short term or long term gains. (or can be carried forward for 8 years)

      • Hi,
        Thank you for your reply.
        I will take an example (for above scenario).
        If I buy the fund for Rs 10,000 and after 3 months receive dividend of 1,000. And at that point investment value became 9,500 (because of dividend NAV fell, and there ware some gains). If I sell at that point of time, will I be eligible for short term losses? – I am asking this as I get different opinions from different sources, so I wanted to reconfirm. Some one tells me, since I received dividend I need to account that also before claiming short term loses against that investment. In this case if I account for dividend, it will result in no short term losses.
        Please let me know.
        Satya

  19. What abt an STP linked with a Liquid Fund? How these systematic transfers from Liquid fund to another equity fund will be taxed?

    • Hi Rajesh,
      Taxation will happen on 2 places
      1st when your amount will move/switch from liquid – debt taxation will apply
      2nd whenever you redeem equity – equity taxation will apply

  20. Hi Hemnat,

    I have invested 1 lac in reliance floating rate fund (Debt Fund), at time of redemption fund value was approx 1,09,700. But AMC has paid only approx 1,07,000.
    On inquiry they straight away told me the NRI are subjected to 20.6% TDS deduction.
    Is this information correct, are there any way i can ask for a return from Income tax. Because if i calculate with indexation, i am actually not making any gain. With indexation in place, value should be higher.

    Pl reply & advise.

    Gagan

    • Hi Gagan,
      This is correct that TDS is deducted in case of NRIs. But I don’t agree with this “f i calculate with indexation, i am actually not making any gain.”
      You can take the refund if you are filling taxes in India.

  21. Hi,

    Have query pertaining to ULIP insurance policy, wanted to know if I stop paying premium after 1st year. Policy fund value as on date get allocated debt account with annual compounded interest @ 4.5% and till end of lock in period of 5 years customer will not be able to withdraw money. If I wish to withdraw money after 5 years of lock in will it attract any TAX? pls clarify..

    • Hi Hemant,

      Have query pertaining to ULIP insurance policy, wanted to know if I stop paying premium after 1st year. Policy fund value as on date get allocated debt account with annual compounded interest @ 4.5% and till end of lock in period of 5 years customer will not be able to withdraw money. If I wish to withdraw money after 5 years of lock in will it attract any TAX? pls clarify..

  22. I have invested in a liquid fund with daily dividend reinvestment?Dividend is not taxable but if I sell the funds before one year-do I need to pay tax on the new units alloted based on daily reinvestments?
    Further as at End Mar (Financial year) the MF house sends statement of one’s portfolio where they mention notional gain or loss-does one need to show that in one’s returns?
    Lastly,if I am under 10% bracket why did my financial planner recommend me liquid fund daily reinvestments where the tax distribution by Fund house is close to 27%.Technically I lose 17% of my income-is that correct?

    • Hi Mahesh,
      In first case answer is yes – you need to pay the tax on units that are created by reinvestment.
      Regarding Second point – no need to show notional gains as this is not interest income.
      For person who is in 10% tax slab – growth option is better.

  23. I had invested Rs.10000/- in TATA Young Citizen Fund in 1995 September and redeemed in Feb.2012 at value of RS.78000/-. Though it is a balanced fund by nature yet the maximum investment in equities as per Scheme details will not be more than 50%. Will the capital gains be subjected to TAX as applicable for debt funds or equity funds. The fund has not deducted any amount at source besides STT. Please advise. Regards Saurabh Goel

  24. Hi,
    What about TAX for MF opted for SIP investment. Is it taxed according to what norms?

    With Regards,
    Hemanth

    • Hi Hemanth,

      Every SIP installment is fresh purchase and so units bought on every installments will be taken for calculating LTCG or STCG.

  26. Even though international fof likr dsp goldmine are more then 65%equity,still they would be taxed as debt. Right hemant ji

  27. What will be STT rate applicable on equity mutual fund at the time of redemption wef 1July12?will it be .25% or .2% due to changes in STT by budgetary/finance Act 2012 provisions.

  28. I just read the above article. Even if the article is dated and the exact Tax rates have changed since this was written, this is still a fantastic article. Written very nice and clear. Many thanks.

  29. Hi Hemant,
    A nice article written in very simple language for people to understand. Have a question though..

    I understand we can offset ST losses against ST Gains and LT gains. However LT gain for equity MFs in taxed 0, whereas LT gain on Debt MFs is chanrged 10% or 20% w/Index.

    1) Can ST Gain/Loss from Equity MF be offset against LT Gain/Loss from Equity MF ? I guess the answer is YES
    2) Can the Equity ST Gains/losses be offset against LT gains/loss from Debt funds ?

    Regards
    Sandeep

    • Hi Sandeep,

      Yes, short-term capital losses may be offset against both long term and short-term taxable capital gains. But long term losses can be offset only against taxable long term gains .

  30. Hi Sandeep,
    Let me venture to answer your twin queries.
    But firstly there is no question of off setting a net ST gain or net LT gain. When there is a gain you have to pay tax as applicable.
    For setting off loss in LT or ST, in a given year you can proceed like this: First sum up all your ST gains and losses in a year from various schemes and arrive at net loss or gain. Similarly sum up separately all LT gains and losses from various schemes and arrive at net loss or gain.
    If there is a net gain pay tax ( ST or LT) as applicable.
    If there is loss they can be carried over to the next year(s). While doing so ST and LT can not be mixed always. Carried over ST losses can be used for off setting against LT and ST gains in the next 8 years. But carried over LT losses can be used for off setting only LT gains.
    Regards,
    Raj.

  31. Hi Hemant,

    I had opted for Dividend Re-investment Debt Mutual Fund on which Dividend Re-invested every weekly. What will be the Tax Treatment if i sold it after 1 year or before 1 year. Example, I purchase for Rs. 1,00,000/- and Total Dividend Re-investment is Rs. 40,000/- and i sold it for Rs. 1,50,000.

    and 2nd thing i want to know is can we setoff Short Term Capital Loss of Debt Mutual Fund with Short Term Capital Gain of Equity Mutual Fund and Vice Versa.

    • Dear Ranjit,

      A dividend reinvestment is counted as a fresh purchase of units and so any gains earned on this reinvested units will be taxable as per the period of holding.

      Yes you can set-off short term capital loss in debt funds with short term capital gains in equity funds.

  32. Hi Hemant,

    i am a regular investor thro on line .Many a times, if fund performance is not good, i will switch from one fund to another : for example from ICICI focussed bluechip to FMCG fund, then what is the Taxation applicable if again i switch back or switch/redeem( before 1 yr or after, both cases)

    thanks in advance

  33. i have invested in ICICI pru FMCG MF (growth option). Is long term capital gain on this fund is nil? If nil please clarify how it is nil.

  34. Hi all!
    I have some queries regarding taxability of income from Mutual fund in hands of Corporate. The companies one of the main object in MOA is investment in Mutual fund. Whether its income form above fund is taxable under capital gain or PGBP?

    • Dear Amit,

      Yes, income from mutual fund will be taxed as capital gains when it is investments and not the major line of business.

  35. hi
    i have invested in Baroda Pioneer treasury Advantage Daily divident reinvestment-liquid plan ,So Divident is paid daily and reinvest daily

    I have following question :
    (1) Do i have to pay any short term or long term gain tax on it ?
    (2) If i will show the above mutual fund in my tax return then how much tax should it deduct
    (3) i am in 10% tax bracket, so which one should good for me either Daily divident reinvestment OR Groath Plane

  36. Sir,
    In the case of Mutual funds, when switching out from one fund another fund and after some time if that fund finally sold out, what would be the income tax liability for an NRI. All these happens within in a year time. Kindly clarify.

  37. Hi,
    I invested Rs 30,000 in UTI Gilt Advantage Fund in October 2008 and redeemed for Rs 39,000 in August 2012. I have a LT gain of Rs 9000. However, the indexed cost is about Rs 43,900 resulting in capital loss. Can I take the indexation and consider that I incurred LT capital loss in the Debt fund and avoid paying tax? Pls advise.

    • Dear Mr.Ravichandra,

      Indexation benefit is allowed in long term capital gains from debt funds and if it gives a capital loss then you do not have to pay any tax.

  38. I was an NRI till March 12. Wile I was an NRI , I had invested in HDFC MIP Long Term Growth (Invested during financial year 2011-12) .

    Want to know if this investment qualify for deduction from income (upto Rs 1 lac) under section 80 C ?

  39. Dear Mr. Hemant,
    Related to ULIP, i have invested 60,000/year in ICICI PRU PINNACLE for 3 years with a total amount paid as 1,80,000.
    I have surrendered that and got an amount of 1,59,000 would be eligible to show that difference as Capital Gains Loss?

  40. Hi,

    I am still a bit confused abt the taxations with regard to STPs from liquid or debt funds. I plan to increase my investments in my existing fund – UTI Opportunities, through a lump sum investment in UTI Liquid Cash Plan and start weekly STPs. Keeping in mind that these STPs will be done for a time frame of over a year, i have opted for the growth option in the liquid fund. I plan to duplicate this approach with other existing equity funds with HDFC & ICICI in the near future.
    My question here is –
    1) Do these weekly/monthly STPs attract STCGs as per my slab (30%)?
    2) If yes, how do I minimize tax incurred during the STPs from the liquid fund? Will a dividend reinvestment option work out better in this case?
    3) Would a short term debt fund be better for this purpose (of course, keeping in mind exit load & lock-in periods)?

    Would appreciate any feedback. Thanks!

    • Hi Deepta,

      Any withdrawl from debt fund before one year will have short term gains and so the tax will be STCGT. You can reduce this by opting for dividend option which in your hands are tax free but company pay a DDT which is far lower. Its better to have the strategy from a liquid fund as some of your investment will have a very short period and short term funds are prone to interest rate risk to some extent.

  41. Sir
    If being an HUF we have sold the property and the sale proceeds are invested in IDFC mutual fund whether dividend from that mutual fund would be taxable in our hand or not?

    • Hi Nitasha,

      Dividends from Equity mutual funds are tax free for Individual or HUF. If its a debt fund the dividend will be paid by the company after deducting relevant DDT.In investors hand the taxability do not arises in either case.

  42. This article answered the questions I had regarding Mutual Funds and Taxes. It was clear and in unambiguous language. You also explained things in such an order that I didn’t have to read anything a second time to understand. Thank you for the excellent article and keep up the good work.

  43. Grateful if u could clarify the tax situation for the flwg situation :

    Purchased hdfc cash management daily reinvestment 1000 @ 10.31 / unit in 2009
    Have been regularly receiving dividend which was reinvested @ 10.31 until 2013
    Total holdings (initial investment + dividends reinvested) in 2013 sold at 10.31/unit.

    1. No tax on dividends reinvested ?
    2. No capital gain on original investment as price of purchase and sale at same price. In fact could be a ltc loss if one uses indexing.
    3. No capital gains on original on units bought from dividend received upto 12 months prior to sale as the acquisition and sale price same. As in point 2 could be ltc loss if indexed.
    4. For units bought within twelve months of sale will attract dtc gain if there is a profit in the acquisition and sale price ?

    Would greatly appreciate your response to above. Thanks in advance.

    • Hi Ramesh,

      1. For investor there is no tax on div- reinvested but there is already a dividend Distribution Tax which company has paid before distributing dividends.

      2. Since you are receiving dividends, the capital appreciation will be negligible in your case.

      3.The taxability of gain will arise in this investment even if it is after a year period since its a debt mutual funds scheme.

  44. hi hemant,
    i have invested 52 lakhs in equity mf’s over the last 10yrs. the last investments were in 2008. i have redeemed all mf’s in jan 2013. i know there is no long term tax applicable. could you enlighten me about tax through indexation if applicable?

  45. Hi ,

    I have a question could mutual fund can be used as tax saving instrument like (ppf,5 YR lock FD). I heard about a new rule of mutual fund for new investor upto 50000rs investor can show as tax saving investment and lower down their taxable income .

    • Hi Karry,

      There are specific mutual funds schemes for availing tax benefit under Section 80C. These are termed as ELSS (Equity Linked Savings Schemes) which carry a three year lockin. The other option which you have mentioned is Rajiv Gandhi Equity Savings Schemes where by investing Maximum Rs 50000 you can avail tax deduction from your income for 50% of the invested amount i.e. max Rs 25000. This benefit is over and above sec 80C but the scheme has certain conditions which need to be fulfilled to avail the tax benefit.

  46. I HAVE INVESTED IN HDFC PRUDENCE DIVIDENDED REIVESTMENT IN YEAR 2008 RS 50000 NOW I WANT TO SELL IT WHAT WILL TAX LIBILITY ON DIVENDED REINVESTMENT PLAN

    • Dear Mr. Agarwal,

      When you invest through a dividend reinvestment option, every dividend reinvested is counted as fresh investment and from the date of its investment your gains will be computed for the respective units. So any dividend reinvested has not completed one year, the gains on this particular units alloted to you will be short term capital gains.
      I hope it answer your query.

  47. Hello,

    I hold few foreign mutual fund (all of them are US based). I am living in India for last 8 years and US Citizen. How do I treat the Dividends & Dividend reinvestment from foreign mutual funds?

    Thank You
    Sun

  48. I am NRI, One and half year ago I invested into debt fund and recently I have taken the redemption in debt category fund, and AMC had cut the TDS of 20% while I was thinking that TDS to be cut after adjusting the indexation. when I contacted the AMC they have on answer for that.pls. assist

  49. I have been a regular reader of this blog since Jan 2012 and I have read every article. I had started investing in MFs after this and I must say that it has been fruitful in inculcating the habit of SIP, asset allocation and portfolio readjustment . The best has been not to fall prey to insurance sellers. On a recent occasion a chartered accountant who was an insurance agent tried hard to sell it to me. In fact, it is a habit to re-read all the old articles on a leisurely saturday /sunday every 4-5 months just to retain the knowledge. For that I must thank Mr. Beniwal and others for taking time and writing so well on so many issues.

    I was switching from a SBI debt fund to liquid fund and I had this nagging doubt. I mailed SBI. They replied that they dont charge any exit load for the switch. But they suggested to check on capital gain else where.

    I was hoping that Mr. Beniwal would write an article on taxationand exit loads when you switch within a fund house like from a debt fund / liquid to equity or vice versa or to any other fund categories when you want to balance the portfolio. …. and as to how to obtain a capital gains statement for IT calculation purposes. I tried to find answer to this in other websites too and nobody seemed to say anything about this.

    Thank you and keep up the good work

  50. I am a salaried employee paying tax. My employer deducts TDS from my salary. I Invested Rs. 1 Lakh in a debt fund and withdrwan Rs. 101000. after one month thereby gaining Rs. 1000. AMC did not deduct any TDS. As per the this page I have to add this amount to my income. How to do it? Whether I need to pay advance tax or I have to declare it during filing of return and pay remaining tax at that time?

  51. Hi Hemant,

    1. I have redeemed one of my mutual fund investment (inception date – 12/01/2010) on 3-Apr-13. The amount is 28184.93
    2. Also I have got dividend from another mutual fund investment on 13-Mar-2014. The amount is 2998.12
    3. I had an ULIP policy with inception date as 28 sep-2009. I have paid this regularly with last payment in sep 2012. I have surrendered the policy on 23/08/2013. Minimum term for policy payment was 3 years. The amount received was 95,679.34
    I want to know for 1st and 3rd point where should I mention this amount. Wether this will be taxable amount of non taxable amount?
    I will be greatful if you could share your input on this.

    Regards,
    Neeraj Srivastava

    • Neeraj,

      Gains received from mutual funds are capital gains and so will be shown under Income from Capital Gains. Contrary to this Withdrawals from ULIPs fall under sec 10 (10) D and so are exempted. However, do check your policy documents to confirm as many changes were brought in by IRDA in last few years.

  52. Is indexation apply on debt mutual fund with dividend option for long term investment ? (> 1 year). If yes, how to account for div. received while calculating gain/loss?

    • RSr,

      Indexation benefit is applicable for capital gains. What you earn from bank deposit is Interest and not capital gains.

  54. Dear Hemant

    I had invested in short term debt mutual funds for a period less than a year in FY 13-14. These were the dividend reinvestment type. I redeemed them within a year. My questions are:
    1. Since the MF has paid DDT, how is the dividend treated for tax in my hands?
    2. Do I show the dividend income as Exempt income in ITR?If not, where in the ITR?
    3. Can you quote the exact IT section(s) covering this?
    Grateful
    Govind

    • Govind,

      1. Dividend from debt mutual funds is tax free in the hands of investors.

      For ITR you can take assistance from a tax expert.

  55. Kindly provide some inputs on taxation of units held of foreign mutual funds.
    In abroad, mostly Mutual funds enjoy a pass through status..So how is the return on investments made in units of mutual fund be taxed ?

    • Chirag,

      Income from foreign mutual funds will be taxable in the hands of investors. You can consult a tax expert for taxation details.

  56. sir please hav a look of my profile and suggest me the best :
    salary 9 Lakh annul
    saving 35 k / month (all in Provident fund)
    now i want to invest first time in SIP (HDFC TOP 200) as Rs 5000 per month for 20 years. My questions are : 1. The fund selected by me is correct?
    2. will i have to pay any tax after maturity of my SIP.
    3. In the saving of Rs 35 K, if you can suggest any other profile for me.

    i am very new to this and your advice will be highly appreciated.

  57. Hi
    I have invested in Mutual FUNDS in ELSS in different categories. I have opted for Dividend re-investment. Does the dividend re-investment amount apply for deductions under sec-80C to gap uto the allowed limit of INR 1,50,000.00

  58. please explain
    what would be the taxability in case of dividend reinvestment plan?
    would it be redemption amount less original investment
    or
    redemption amount less dividend reinvested less original amount?

    • Ruchi,

      Dividend reinvestment is a fresh investments and so any capital gains you earn on this amount will be subject to capital gains tax based on the period of holding of reinvested units.

  59. Dear Hemant Ji,

    1) I invested in an Equity MF a month ago in Dividend Option. Say the Fund declares a Dividend now, and after receiving the Dividend, I sell my entire holding. I am not worried about the STCGT which I understand is 15%. BUT, is it necessary for me to have held the Units for some minimum time frame – 2 months or 3 months or 6 months – for the Dividend to be treated as tax free ?

    2) There is an Equity MF called ICICI Prudential Exports & Other Services Fund. The Exit Load for this Fund is 2.50% if sold before 2 years. The Exit Load figure shows on their Statement and also on ICICI website. The period is double and the load is more than double. Is this legal ? Does SEBI not regulate how much the maximum Exit Load can be ?

    Thanks for your time.

    • Alok,

      1. Dividends received from equity mutual funds are tax free in the hands of investors. So you won’t be liable to pay any tax on it.Only if you withdraw any amount from your investments you will be then liable for payment of capital gains tax.

      2. SEBI does have maximum cappings on the expenses a mutual funds scheme can charge. But that’s on the recurring expenses. Exit load is only charged when you withdraw within a specific time horizon else you do not pay any charge. As per new norms all these exit loads are now ploughed back to the NAV.

  60. Hi,
    I am having the below query regarding the Tax on Mutual Fund
    1> I am investing 2000/month in HDFC Top 200 Fund (Growth). Is this Equity or Debt Mutual Fund ?
    2> After 4 years since I done the investment, redemmed 200 units . How my tax will be calculated ?
    3> How I can able to get the Capital Gain statement of 200 units ?
    4> How I can put (under whhich head) my Capital gain while filling the Income Tax Return ?
    5> How I can mention the Short term loss under the same Capital Gain head, while filling the Income Tax return ?

    Awiting your respose !!!
    Wishing you a happy and prosperous new year 2015 !
    Pravakar

  61. Kindly let me know the taxation applicable on the UTI Money Market Fund Growth Plan. Investment was done on 31-07-2013 and redemption is taken on 04-01-2015 on amount of Rs. 1 Lakh.

    • Vishagra,

      As per budget 2014 provisions the gains form debt funds before three years wil be treated as short term capital gains while more than 3 years as long term capital gains. This rule applies to all the withdrawal after June 1st 2014, Since you have not completed three years short term capital gains tax will apply.

  62. please clarify if the original amount inveted in ELSS is taxable in the year of redemption after lock in period of 3 years

    • I Ramamurthy,

      Capital is non taxable. only gains are taxed which in case of ELSS is zero since its an equity scheme and held for more than 3 years.

  63. Sir,

    Reg: Bonus option on Debt oriented Mutual Funds (UTI-ULIP)

    ****
    I stumbled on your article about the above mentioned scheme in your website. In this connection, I hereby placing a query:

    I am a holder of UTI-ULIP scheme for a long time and holding the units even after maturity. They have regularly declared BONUS every year. Now my all the Units are long term.
    1. I presume that in respect of the original Units, I can use indexation method while redeeming. Even after indexation, I am finding a long term capital loss. Is it in absolute order?
    2. Can I adjust this long term loss of the original units from the long term gain on sale of Bonus Units and the balance if any be carrying forwarded to the next year?

    No one has so far given any answer to my above query, not even the UTI people.

    Kindly enlighten me.

    Thanking you,

    Yours faithfully,
    V.ARUNACHALAM.
    26-04-2015.

    • This is in response to the question asked by Mr. V.Arunachalam, dated 26-04-15.
      If ULIP is meant to be Unit Linked Insurance Plan or Policy, it is eligible under section 10(10D) for exemption from income tax including the bonus. The investor may be advised to check up the document received at the time of enrolment under the scheme whether there is a mention of tax benefit and he must have also taken the subscriptions made therein for Deduction (u/s 80C) every year of such payments. However, it should be borne in mind that subscription/premium paid exceeding 20% of the sum assured, for policies taken or or after 01-04-2003 and 10% of the sum assured for policies taken or or after 01-04-2012 in any year will not enjoy tax exemptions u/s 10(10D) (except on death during the policy term.

    • This is in response to Mr. Ren’s question “if there is loss in mutual fund at the time of redemption is it taxable – with one year” I beg to differ with the answer given by Mr. Vikas. Short term capital Loss can be appropriated/set off against Short Term/Long term capital gain. The long term capital loss can be appreciated/set off against Long term capital gain only.

  65. If I am investing in MF in monthly installments
    Like, I am Investing 1000 per month in MF
    and After 3 years i have redeemed the same.
    how the taxability will be?
    Will it come under Long term or Short term?

  66. I have some doubt with regard to taxation on mutual fund investments.
    I have made some investments in debt income funds/short term funds. Before completion of the period to be treated as Long term, I switched from dividend option to to growth option and also to direct Plan. In all cases the folio numbers have not been changed. Because of this should such investments to be treated as short term or long term for calculation of income tax when the funds are finally redeemed.

  67. If I have started an STP from debt fund to an ELSS scheme, can I claim the STP amount under tax deduction section 80c etc ?

  68. just want to know whether I have to declare investment in form 16 through my employer for investment made in MF since june 2014 and continuing till date under sip. since I am not thinking to redeem now.

  69. Hi,

    Thank you very much for your post.

    I have few queries on STCG for Assessment Years : 2014-2015 and 2015-2016
    2014-2015:
    STCG: 4713/- (From Equity MF)

    2015- 2016:
    STCG: 2668/- (From Equity MF)

    But i have not paid the amount while filing tax. Could your please guide me how would i file tax for the same.
    Waiting for your response..

  71. I plan to invest some lumpsum in HDFC Prudence – Monthly Dividend fund. The Fund has recently started giving dividend on 25th of every month ? If I invest in this fund then will the dividend that i get monthly be taxed or will it be tax free ? I plan to remain invested in the fund for more than a year ?

  73. If I invest in arbitrage fund and get monthly dividend. It is tax free. But what if I withdraw after four months. Will that dividend I have received be taxed at my end or remain tax free.

  75. Dear Sir,
    I have a FD of Rs.15 lakhs in my daughter’s name (age 23 yrs) and the interest accrued is invested in SIPs (HDFC Top 200 and HDFC Prudence). This has continued for the past 4 years and I plan to continue this for the next 10 yrs. But my daughter is now going for higher studies to US and will remain a student for the next 2 years and if she gets a job there will start earning there. My question is – if 10 yrs from now if she redeems the SIP amount, will she pay taxes as an Indian citizen? Will she also incur any additional taxes to be paid in US?

  76. dear sir, i got profit of rs. 8000 in redemption of HDFC high interest dynamic plan & rs. 5000 of BIRLA SUNLIFE dynamic bond fund after 4 years. now i would like to now the amt. of tax liability in F.Y. 2015-2016.

  77. sir
    I heard about Birla Sun Life Cash Plus fund. I want to invest in it. how i will be taxed?
    1. if i withdraw money within few weeks without gaining any profit
    2.if i withdraw entire money within few weeks with gaining profit
    3.if i withdraw partial money within few weeks with gaining profit
    kindly throw your light on this issue. Because i heard it is like savings account.

  78. Hi,

    What happens if i redeem amount invested in a debt fund before 3 years and invest the entire amount immediately in another debt fund? Does this exercise attract short term capital gain tax?

  79. I invested 25K in 2016-17 in an ELSS. Can I apply for Tax benefit on the same amount in 2017-18 as well ?

  81. dear sir
    my salary is a 22000 pm so i no need to tax pay by i was invest in mutual fund in 2011 of 100000 sbi bhlue chip and it was amound i gote 380000 rs so my income is 544000 so i need to pay a tax yes or no?

  82. I make SIP for icici pru focused bluechip equity fund(g), every month i invest Rs. 2000, after 22 Month (Rs. 44000 total Investment) i redemed it and gain Rs. 52668 (Rs. 8668 Gain), So What Tax applicable.?

  83. Useful article. I shall be grateful for following clarification. I have redeemed units of Monthly income plan – quarterly dividend option – after 14 years of purchase. Can you please advise what will be the tax implication on gain on redemption ? Can I claim indexation benefit ? The scheme is an open ended scheme.

    Thanks and regards
    Rakesh

  84. Dear Hemant,
    My daddy will be retiring sept end this year. He will get approx 60 lacs amt. He want to invest it in liquid mutual funds then STP to balanced fund then SWP monthly. Some queries he has that during STP from liquid fund any interest received in liquid fund that will be invested in balanced fund through STP, will attract taxation or not? Second is can he park all amount in liquid fund of one AMC like SBI mutual fund and transfer through STP to balanced fund of HDFC and ICICI?

    • Hi Chetan,
      Gain in liquid fund will be added to your father’s income & taked accordingly.
      You have to invest in liquid funds of amc in which you would like to purchase balanced fund. You can’t transfer money from sbi to hdfc.

  85. Hello Sir,
    I am a retired person. I would really appreciate your advice. I would like to invest in Mutual funds, from which I can get a regular monthly income.
    My bank advised me to go for the bank’s Purdence Funds, with a horizon of 3 years, and I would be getting approximately 75 % of the interest as monthly dividend, and the remaining part of the interest will be added to the capital. I was told that this total interest is Tax Free. Is this a correct information.?
    Thank you.

  86. Hello Hemant Sir,
    I read all your blogs
    Read yr book also
    Really wonderful and knowledgeable blogs written by you.Need your help please if you could

    My question is :

    If an Ordinarily non resident Huf individual gifts a huge amount in lacs to his resident wife’s normal savings account in India ,then what are the tax liabilities on gift tax on huf as well as resident wife
    spouse .
    Please let me know as we need to invest these funds in mutual funds but i think it is 30 percent taxable plus tds on dividends in case of nri or non ordinarily resident hufs is levied.

    Its really unclear when we try to read different topics related to it on the net.

    Although some CA,s have suggested me to shift funds to my resident account and then invest mutual fundd.

    Thanks

    R Verma

  87. Hello sir, i am planning to invest 15 lakh. Rupees in mutual fund industry (5 lakh in hdfc balanced fund, 5lakh in sbi blue chip fund & 5lakh in canara robeco.) for next 10 yrs. My question is 1)about the tax on capital gain.?
    2)about my portfolio should i change. Or it looks good.?
    Please help me to take right decision thanks..

  88. Sir,
    I have purchased SBI Magnum Balanced Mutual Funds for Rs. 5,50,000/- on 20/02/2017 and subsequently for Rs.4,00,000/- on 22/3/2017. On verificaction at camsonline website the number of days shown 329. Kindly advice in case I sold units amounting Rs.5.50 lakhs before 1 year, 365 days the exit load of 1% and Tax @ 15% is payable. Kindly advice how long I need to wait to avoid existload of 1% and taxation / TDS .

  89. Sir,
    I am 71yrs old retired from active medical practice. I have invested Rs 15 lakhs in SCSS saving scheme in post office so that i will be able to get regular interest quarterly basis for my monthly expense. I need another source of monthly income saving scheme and after reading many articles in financial magazines, i have decided to invest in “Systemic Withdrawal Plan” with SBIMF. I decided to invest an initial amount of Rs 4000000 (forty lakhs) in SBIMF Bluechip fund which is a large cap fund (regular plan-growth option) and after one year to start the SWP to avoid short term capital gain tax. After 1 yrs,. the SWP withdrawal will be Rs 40,000/- (forty thousand) per month for 10 yrs. Tell me 1. whether the initial amount will be enough for 10 yrs on SWP . 2. what will be the capital gain tax for this plan?

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