Capital gains made on mutual funds are taxable in India. Such gains are classified into two types: short term capital gains (STCG) and long term capital gains (LTCG). The STCG in the case of equity and equity-oriented schemes are gains that are made on units held for 12 months or less, while LTCG are gains made on units held for more than 12 months.
Tax on equity-oriented funds
The STCG on equity and equity-oriented mutual fund schemes are taxed at the rate of 15%, plus surcharge and other levies, while there is no tax on LTCG on equity-oriented schemes. The equity and equity–oriented schemes are those that invest at least 65% of their fund corpus in Indian stock market.
Tax on debt funds
However, tax is levied on both categories of gains (STCG and LTCG) made on non-equity oriented (debt) mutual fund schemes. Debt funds are those that invest a major portion of their corpus in debtinstruments and a small portion in equities. Some of the types of debt funds include liquid funds, income funds, gilt funds, MIPs, FMPs, gold ETFs, etc.The STCG in the case of debt funds are gains that are made on units held for 36 months or less, while LTCG are gains made on units held for more than 36 months.
The STCG on non-equity oriented schemes are taxed at 10% to 30%, as per the income slab plus surcharge and other levies, while the LTCG on these schemes are taxed at 20% with indexation benefit, plus surcharge and other levies. The indexation facility available on LTCG made on non-equity oriented funds takes into account the increase in inflation from the year of subscription to the mutual fund scheme till financial years in which the units are redeemed. Indexation allow the investor to adjust the purchase price of mutual fund units taking into account the rise in inflation, thereby reducing the tax outgo.