Mutual funds are taxed according to the types of assets they hold and the duration for which you hold on to the units.
Equity-Oriented Funds
Equity-oriented funds invest at least 65% of their assets in equity and related instruments. If you sell the units of such funds after 12 months and make a profit, then the profit is termed a long-term capital gain on a mutual fund. The Long-Term Capital Gain over ₹1 lakh in a financial year is taxed at the rate of 10%. That is, a 10% LTCG tax is levied on the amount in excess of ₹1 lakh.
Capital gain is calculated by deducting the buying cost of a fund from the sale proceeds. It is dependent on the NAV at the time of selling and buying.
If you sell the units in less than 12 months, the gains are called short-term capital gains (STCG) and are taxed at 15%.
Debt Funds
Capital gains from mutual funds (specifically debt funds) that invest less than 35% in equity instruments are added to your income and taxed as per your tax slab rate.
Hybrid funds:
Gains on Conservative hybrid funds, that have an equity exposure of 10 –25% and a debt exposure of 75% – 90% are taxed as per your income tax slab rate.
Gains on funds that have an equity exposure of more than 35% but less than 65% are taxed at slab rate if held up to 36 months, but are taxed at 20% with indexation if held beyond 36 months. These include certain multi asset/dynamic asset allocation funds and balanced hybrid funds.
Gains on Aggressive hybrid funds that have 65 – 80% exposure to equity and 35% – 20% exposure to debt are taxed at 15% if held up to 12 months, and at 10% if held longer than 12 months.
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Dividend
The income from dividends is added to your income and is taxed at your income tax slab rate. If dividend earnings in a financial year are more than ₹5,000, then TDS is deducted at a rate of 10%.
Mutual funds levy certain charges to cover their distribution costs. These charges are called ‘loads’ in mutual fund parlance.
Entry Load
Since August 1, 2009, no entry load has been levied on investors. Before this date, an entry load of 2.25% was levied when an investor invested in equity-based funds.
Exit Load
Exit load on mutual funds is charged when you redeem the units before a certain pre-defined period. Exit load varies from scheme to scheme and is mentioned in the fund documentation This is to be carefully noted at the time of investment.
Other Charges & Expenses
Mutual funds charge you for their various expenses. The key components of these expenses are administrative costs, management fees, and distribution fees. These expenses cover the costs of mutual funds for advertising, customer service, fund manager salaries, etc. These expenses are deducted from the fund’s daily NAV
Tax on mutual fund income depends on the type and structure of the fund and the holding period of the units. Tax is then levied on capital gains at the applicable rates. Dividend income is taxable if you fall in the taxable income tax slab. Apart from tax, mutual funds charge you for the expenses they incur in running and managing the funds.
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