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Short term vs Long term capital gains: How are your mutual fund investments taxed


A mutual fund is one of the best ways to enhance one’s financial health. Although it is associated with market risks, mutual funds have gained a lot of popularity. As we know any kind of income comes under taxation, in the same way, the capital gain of mutual funds is also subject to taxation. As there are several mutual funds schemes available in the market, taxation also varies accordingly. The tax on mutual funds is generally calculated upon the capital gain assured at the end of the term. Here is a detailed guide on how tax on mutual funds depends on the long term and short term capital gain.

mutual fund investments taxed

What is long term Capital gain?

The holding period of 12 months or more than that is considered as a long term holding period for equity mutual funds. For debt funds, the period of at least 36 months or more is considered a long term holding period. The total gain during this time is termed as long term capital gain.

What is short term capital gain?

If the total holding period is less than 12 months, for equity mutual funds then it will be a short time holding period. In the case of debt funds, the duration is less than 36 months. The total capital gain assured in this duration is short term capital gain.

Taxation on mutual funds

For different types of mutual funds, the taxations are different. Go through the details given below to know more about taxation on mutual funds.

Tax saving equity funds

Tax saving ELSS has a lock-in period of three years, which means that you are not allowed to make any withdrawal before three years. At the time of reclamation, if the total investment that is made exceeds the range of one lakh, then LTGC will be applied at a rate of 10% without indexation. In case the amount is less than Rs. 1 lakh, you do not need to pay any tax on mutual funds.

Non-tax saving equity funds

There is no taxation for long term capital gain on investments up to Rs. 1lakh. But if the LTCG exceeds Rs. 1lakh, taxation at a rate of 10% is applicable without indexation benefits. Also, before the completion of 12 months or one year, any short term gain from equity funds is taxable at a rate of of15%.

Debt funds

For long term capital gain, LTCG in debt funds is chargeable at a tax rate of 20% after indexation.

Balanced funds

It is an equity-oriented hybrid fund, which invests a minimum of 65% of their assets towards equities. The way of taxation on balanced funds is similar to the taxation processes in non-tax saving equity funds.

Systematic Investment Plans (SIPs)

A Systematic Investment Plan or SIP allows the investor to invest a various small amount in different mutual funds. An investor can invest a fixed amount of money on a quarterly, monthly, fortnightly, weekly or a daily basis. On the basis of the type of mutual fund, the tax is being charged. It also depends on the duration of the holding period. Each SIP is considered as a new investment, therefore, taxes are applicable on the gains separately.

As per the above information, it can be concluded that the tax on mutual funds depend on the holding time. Though long term capital gain attracts lower tax charges than short term capital gain, it also varies on the amount you invest.

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