How Do Taxes Work on Equity Funds?
Mutual Funds must have at least 65% of their portfolio invested in equities to qualify for equity taxation. This includes pure equity funds like large-cap, mid-cap, and small-cap funds, as well as ELSS (tax-saving) funds and aggressive hybrid funds with substantial equity exposure.
Here’s how equity mutual funds are taxed:
| Holding Period | Type of Gain | Tax Rate | Taxable Amount |
| Below 1 year | Short Term Capital Gains (STCG) | 20% | Taxed on the entire gain amount. |
| Over 1 year (12 months) | Long Term Capital Gains (LTCG) | 12.5% (on gains exceeding ₹1.25 lakh annually) | Gains up to ₹1.25 lakh are tax-free; only gains above ₹ 1.25 lakh are taxed. |
STCG: If you sell your fund units within a year, your profit is taxed at 20%, regardless of your tax bracket.
LTCG: If you hold the units for over a year, profits over ₹1.25 lakh are taxed at 12.5%.
Before 31st January 2018, there was no tax on long-term capital gains (LTCG). However, starting in February 2018, the government introduced a LTCG tax for profits. Gains made before January 31, 2018, are protected and not taxed — this protection is called “grandfathering.”
Let’s Simplify with Examples
- Buying Before Grandfathering Date
- You bought a mutual fund in January 2015 for ₹1,00,000. By January 31, 2018, the value rises to ₹1,50,000, and you sell it in January 2021 for ₹2,00,000.
- Your taxable gain will be ₹50,000 (₹2,00,000 – ₹1,50,000).
- Buying After Grandfathering Date
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- If you buy a fund in March 2018 for ₹1,00,000 and sell it in March 2023 for ₹2,50,000, your taxable gain is ₹1,50,000 (₹2,50,000 – ₹1,00,000).
- Profit Less Than ₹1.25 Lakh
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- If your total gain for the year is under ₹1.25 lakh, you pay no LTCG tax since it’s under the exemption limit.
- Dividend Taxation
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- Dividends are now taxed according to your income tax slab. For example, if you’re in the 20% bracket, you’ll pay 20% tax on the dividend you receive.
Tax rules for equity funds can seem tricky, especially with changing laws and exemptions. An AMFI-registered mutual fund distributor or financial advisor is your go-to expert for understanding these details and choosing the right funds based on your goals. They ensure your investments are optimized for returns and tax efficiency. Taking advice from a professional helps you avoid mistakes and make informed decisions. An advisor not only simplifies complex tax rules but also aligns your investments with your long-term financial goals. Always remember expert guidance can make a significant difference in achieving financial success.
