Part 2: Understanding Mutual Fund Taxation - Equity, Debt and Hybrid Mutual Funds

DSIJ Intelligence-2 / 27 Feb 2025/ Categories: General, Knowledge, Trending

In the previous article Part 1: Understanding Mutual Fund Taxation - Dividend Taxation, we discussed the taxation of mutual fund dividends. Now, in this article, we will focus on how capital gains from different types of mutual funds (equity, debt, and hybrid) are taxed.

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Taxation of Equity Mutual Funds

Equity mutual funds are widely preferred for long-term wealth creation. However, tax treatment on capital gains has changed post-Budget 2024. The tax structure is as follows:

Capital Gains Type	Before Budget 2024	After Budget 2024
LTCG (Long-Term Capital Gains)	Tax Rate: 10 per cent Holding Period: Over 12 months	Tax Rate: 12.5 per cent Holding Period: Over 12 months
STCG (Short-Term Capital Gains)	Tax Rate: 15 per cent Holding Period: Less than 12 months	Tax Rate: 20 per cent Holding Period: Less than 12 months

Despite the increased tax rates, equity mutual funds remain a tax-efficient investment choice for long-term investors.

Taxation of Debt Mutual Funds

Debt mutual funds are preferred by conservative investors for their stability. However, tax treatment has undergone significant changes after April 1, 2023.

Purchase Date	Redemption Date	Holding Period	Tax Rate	Indexation Benefit
Before April 1, 2023*	Before July 23, 2024	>36 months	20.00 per cent	Available
Before April 1, 2023*	On/After July 23, 2024	>24 months	12.50 per cent	Not available
On/After April 1, 2023	Any redemption date	Any holding period	As per income tax slab rate	Not applicable

*For a holding period of less than 36 months or 24 months, as the case may be, gains are added to the taxable income and taxed as per the applicable slab rate.

Investors purchasing Debt Funds after April 1, 2023, no longer receive indexation benefits, making the tax treatment less favorable.

Taxation of Hybrid Mutual Funds

Hybrid mutual funds, which invest in a mix of equity and debt, offer a balanced investment approach. Their tax structure is as follows:

Capital Gains Type	Before Budget 2024	After Budget 2024
LTCG (Long-Term Capital Gains)	Tax Rate: 20 per cent Holding Period: Over 36 months With indexation benefits	Tax Rate: 12.5 per cent Holding Period: Over 24 months No indexation benefits
STCG (Short-Term Capital Gains)	Tax Rate: Income tax slab rate Holding Period: Less than 36 months	Tax Rate: Income tax slab rate Holding Period: Less than 24 months

With the removal of indexation benefits, hybrid mutual funds may offer slightly lower tax efficiency, but they remain a suitable option for investors seeking a balance between equity and debt.

Planning Based on Mutual Fund Taxation

Tax planning is essential to optimise returns. Investors should consider factors like holding periods and fund categories to reduce their tax burden efficiently.

Disclaimer: The article is for informational purposes only and not investment advice.