🔍 Introduction

Equity mutual funds have become a core part of portfolio building in India, helping investors generate inflation-beating returns. However, an often overlooked aspect of investing in these funds is taxation. Understanding how equity mutual funds are taxed is crucial for calculating true returns and optimizing investments.

This article breaks down equity mutual fund taxation across scenarios including capital gains, dividends, SWPs, fund switches, bonus units, NRIs, and more. We also include examples, calculations, and procedures for practical clarity.

📌 What Are Equity Mutual Funds?

Equity mutual funds pool money from multiple investors and invest primarily in equity shares of listed companies. As per SEBI regulations, at least 65% of the total assets must be invested in equity and equity-related instruments to qualify as an equity fund.

Types of Equity Mutual Funds:

1. Large-cap Funds – Invest in the top 100 companies by market capitalization. Stable, lower risk.

2. Mid-cap/Small-cap Funds – Focus on companies ranked 101–250 and beyond. Higher return potential with greater risk.

3. Multi-cap/Flexi-cap Funds – Diversify across large-, mid-, and small-cap companies.

4. Sectoral/Thematic Funds – Invest in specific industries like banking, IT, pharma, etc.

5. ELSS (Equity Linked Savings Scheme) – Offer tax benefits under Section 80C with a 3-year lock-in period.

Understanding the fund type is vital, as taxation rules differ for equity, debt, and hybrid funds.

💸 Taxation of Capital Gains from Equity Mutual Funds

Capital gains are the profit from selling mutual fund units at a price higher than the purchase price.

⏳ A. Short-Term Capital Gains (STCG)

• Applicable when you sell equity mutual fund units within 12 months of purchase.

• Tax Rate: 15% (plus 4% cess)

Example:
You buy 1,000 units of an equity fund at ₹100 = ₹1,00,000 invested. You sell them after 6 months at ₹120 = ₹1,20,000.

• Capital Gain = ₹20,000

• STCG Tax = 15% of ₹20,000 = ₹3,000

📝 Procedure:

1. Calculate holding period (less than 12 months = STCG).

2. Compute sale value – purchase cost.

3. Apply 15% tax on the gain.

4. Add 4% cess if applicable.

🕰️ B. Long-Term Capital Gains (LTCG)

• Applicable when you hold the investment for more than 12 months.

• Tax Rate: 10% on gains exceeding ₹1 lakh/year.

Example:
You invest ₹2,00,000 and redeem after 2 years for ₹3,50,000.

• Capital Gain = ₹1,50,000

• Exemption = ₹1,00,000

• Taxable Gain = ₹50,000

• LTCG Tax = 10% of ₹50,000 = ₹5,000

📝 Procedure:

1. Check holding period (more than 12 months = LTCG).

2. Deduct ₹1 lakh exemption from total gain.

3. Pay 10% tax on remaining amount.

🎁 Taxation of Dividends

From FY 2020–21, dividends are taxed in the hands of the investor.

• Taxed as per investor's income slab.

• TDS of 10% if dividend > ₹5,000/year.

Example:
You receive ₹15,000 in dividends. You're in the 30% tax bracket.

• TDS = 10% of ₹15,000 = ₹1,500 (deducted by AMC)

• Actual tax payable = ₹4,500

• Additional payable = ₹3,000 (during ITR filing)

📝 Procedure:

1. Track dividend receipts from all mutual funds.

2. Declare them under “Income from Other Sources” in your ITR.

3. Claim TDS credit if applicable.

💰 Securities Transaction Tax (STT)

• Rate: 0.001% on equity mutual fund sales.

• Deducted at redemption; not claimable as expense.

Example:
Redeeming ₹5,00,000 → STT = ₹5 (0.001% of ₹5,00,000)

No separate filing needed as it's deducted automatically.

🏦 ELSS Taxation

Equity Linked Saving Schemes (ELSS) allow deduction under Section 80C.

• Lock-in: 3 years

• Tax: LTCG rules post lock-in

Example:
Invest ₹1.5 lakh in ELSS → Tax deduction of ₹1.5 lakh
After 3 years, redeem for ₹2.3 lakh → Gain = ₹80,000 → Tax-free (under ₹1 lakh)

📝 Procedure:

1. Invest before March 31st to claim under 80C.

2. Use ELSS statements for ITR verification.

🔁 Additional Special Scenarios

1️⃣ Switching Between Funds

Switching is treated as redemption + purchase.

Example:
Switch from Fund A to Fund B after 10 months → STCG = 15% tax.

📝 Procedure:

1. Check switch date and original purchase date.

2. Calculate gain on exit NAV of Fund A.

3. Pay tax as per holding period.

2️⃣ Systematic Withdrawal Plan (SWP)

Each SWP is a partial redemption, taxed per holding.

Example:
Invest ₹5 lakh; after 2 years start SWP of ₹10,000/month.
First 5–6 months = LTCG (held >1 year). Later SWPs may attract STCG.

📝 Procedure:

1. Track NAV and units sold in each SWP.

2. Use AMC/CAMS capital gain reports.

3. Split gains between LTCG/STCG accordingly.

3️⃣ Exit Load

Exit load is a fee, not a tax, but affects gains.

Example:
Redeem ₹1,00,000 within 12 months with 1% exit load → ₹1,000 deducted.
Capital gain = Sale proceeds – purchase NAV.

📝 Note:

• Exit load reduces sale value.

• Gains calculated on reduced proceeds.

4️⃣ NRIs and TDS

• Same STCG/LTCG tax rates apply.

• TDS deducted at source:

  • 15% STCG

  • 10% LTCG

  • 10% on dividends > ₹5,000

Example:
NRI earns ₹2 lakh LTCG → AMC deducts ₹10,000 as TDS
Can file ITR to claim refund if eligible.

5️⃣ Fund-of-Funds (FoF)

If underlying fund holds <65% in equity, taxed like debt:

• STCG = Income slab rate

• LTCG = 20% with indexation

📝 Tip:

Check scheme info document to verify classification.

6️⃣ Bonus Units & Dividend Reinvestment

• Bonus units: Cost = NAV on bonus date

• Reinvested dividends: Treated as fresh purchase

Example:
Reinvested ₹5,000 dividend on Jan 1, 2023 → Redeemed in Feb 2024 → LTCG applies if gain > ₹1 lakh/year

7️⃣ Transmission on Death

• Transfer to nominee is not taxed.

• Future sale → Tax as per original investor’s purchase date and cost.

Example:
Deceased bought in 2020; nominee sells in 2025 → LTCG with original holding.

8️⃣ Fund Manager's Internal Transactions

No tax on buying/selling stocks within the fund.
Only redemption by investor triggers taxable event.

📉 Set-Off and Carry Forward of Losses

📝 Procedure:

1. File ITR before deadline.

2. Disclose capital loss in Schedule CG.

3. Carry forward unused losses.

📊 Summary Table

❓ FAQs

Q1. How can I calculate taxes for SIPs?
Each SIP is treated as a separate purchase. Use FIFO to determine which units are sold. AMC statements or CAMS help.

Q2. Do I pay tax if I switch funds?
Yes. Switch = Sale + New Investment. Capital gain taxed accordingly.

Q3. Can I avoid tax using ELSS?
You get 80C deduction, but redemption is still taxed under LTCG (after 3 years).

Q4. How can I save tax on mutual fund returns?
Use tax harvesting, ELSS, and long-term investing to reduce your liabilities.

✅ Conclusion

Understanding equity mutual fund taxation in depth helps you retain more of your returns. From basic capital gains to special situations like SWP, switching, and NRIs, being informed enables you to plan better and reduce tax drag on your investments.

Stay compliant, use available tools like CAMS/KFinTech for capital gain statements, and consult a tax advisor for large portfolios. Smarter tax planning equals faster wealth building.