Capital Gains on Mutual Funds

The following are the types of mutual funds:

1. Listed Equity Funds: This fund is listed under the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are used to purchase shares and stock. These provide higher returns and come with high risk factors.
2. Debt Funds: A portfolio with debt exposure more than 65% and are used to purchase debt instruments. Income from this fund is steady as the dividend is disbursed periodically. The risk factor is low and so is the yield.
3. Equity-oriented Hybrid Funds: The investment of 65% of total assets is made in equity and equity-related instruments and the remaining 35% into debt securities and money market instruments.

1. Debt-oriented Hybrid Funds: This fund invests around 60% of the total asset in fixed-income securities such as government securities, debentures, bonds, and others. The remaining 40% is invested in equity and some other portion in liquid schemes in the form of small parts of the corpus.

Capital Gains on Mutual Funds

Any profit or gains that an individual makes on the sale or redemption of his or her mutual fund investment units are known as capital gains.

These gains can be classified into two types based on the holding period:

1. Long Term Capital Gains
2. Short Term Capital Gains

Short Term Capital Gains in Mutual Fund

In general, Short Term Capital Gains with respect to mutual funds, are the gains or profits an individual makes on the sale of his or her mutual fund investments if the period of holding is less than twelve months. However, short term capital gains can be acquired on both equity mutual funds as well as debt mutual funds.

1. For Equity Mutual Funds: If an individual makes a profit on the sale or transfer of his or her equity mutual fund units before twelve months, then the profits are termed as short-term capital gains.
2. For Debt Mutual Funds: If an individual makes a profit on the sale or transfer on his or her debt mutual fund units before the completion of three years, then the profits are termed as short-term capital gains.

Long Term Capital Gains in Mutual Fund

Long Term Capital Gains with respect to mutual funds, are the gains or profits an individual makes on the sale of his or her mutual fund investments if the period of holding is more than twelve months. Long term capital gains can also be acquired on both equity mutual funds as well as debt mutual funds.

1. For Equity Mutual Funds: If an individual makes a profit on the sale or transfer of his or her equity mutual fund units that were held for more than twelve months, then the profits are termed as long-term capital gains.
2. For Debt Mutual Funds: If an individual makes a profit on the sale or transfer on his or her debt mutual fund units that were held for more than three years, then the profits are termed as long-term capital gains.

Calculation of Capital Gains Under Mutual Fund

Capital gains can be calculated in the following way:

Capital Gains Tax:

The tax  levied on the gains or profits that are made from the sale of mutual funds investment units is called Capital Gains Tax. While long term capital gains that an individual acquires from the sale or transfer of mutual fund investments are exempt from tax as per Section 10(38), short term capital gains that an individual acquires from the sale or transfer of mutual fund investments attract a tax rate of 15% as per Section 111A.

However, the taxation rate is dependent on certain factors such as:

1. Type of fund: The tax levied depends upon the fund types, which are debt-oriented and equity. 
2. Dividend: This is the accumulated profit that is distributed among the investors and does not need assets to be sold. 
3. Capital gains: The tax levied also depends upon the profit earned by selling the capital assets at a higher value than its actual cost. 
4. Holding period: Higher the holding period, lesser will be the tax amount as per the income tax regulation of India.

Taxation on Capital Gain

The tax applicable on capital gains depends upon the type of mutual fund and the holding period. Here are details of short-term and long-term capital gain corresponding to the fund type:

Taxation rates differ for short-term and long-term capital gains. Here are the details on it: 

Taxation of STCG on Sale of Mutual Funds

Short term capital gains obtained on the sale or transfer of equity mutual funds units are taxed at a rate of 15% as per Section 111A only if the following conditions are met:

1. If the sale or transfer of the mutual fund units took place on or beyond October 1st 2004
2. The sale or transfer took place via a recognised stock exchange

However, the rate of tax levied on short term gains or profits obtained from the sale or transfer of non-equity mutual fund units or debt mutual fund units will be according to the income tax slab rate of the investor.

Taxation of LTCG on Sale Of Mutual Funds

Long term capital gains obtained on the sale or transfer of equity mutual funds units are exempt from tax as per Section 10(38). The taxpayer will however be liable to show any long term capital gains or profits when he or she is filing tax returns for the year. However, any long term capital gains or profits obtained on the sale or transfer of non-equity mutual fund units or debt mutual fund units will attract a tax rate of 20% with the benefit of indexation.

Taxation of STCG andLTCG on sale of Mutual Funds for Non-Resident Indians

The tax rates applicable to the short term as well as long term capital gains on the sale of mutual funds for non-resident Indians (NRIs) is as follows:

1. For short term capital gains:
   1. Sale of equity mutual funds: 15%
   2. Sale of non-equity mutual funds: As per Income tax slab rate along with applicable TDS

1. For long term capital gains:
   1. Sale of equity mutual funds: No tax deduction
   2. Sale of listed non-equity mutual funds: 20% with the benefit of indexation
   3. Sale of unlisted non-equity mutual funds: 10% without the benefit of indexation