Ever opened your mutual‑fund statement and felt richer until you remembered the tax on mutual funds? You’re not alone. Knowing exactly how mutual fund taxation works is the difference between building wealth and having it taken away by the taxman.
We sat down with seasoned finance professional Soumya Saswat Mishra to decode the rules, bust myths, and show you smart ways to pay less.
Let’s Talk Mutual Fund Taxes, Expert Insights, Made Simple (Interview Style)
Before your latte has a chance to cool, we’ll show you how to stop the taxman from sipping your returns.
So top up that mug and join finance pro Soumya Saswat Mishra as we spill the beans on mutual‑fund taxation.
Q1. Are mutual funds taxable in India?
Soumya: “Absolutely. One of the biggest misconceptions is that mutual funds are tax-free. In reality, how much tax you pay depends on the type of fund you invest in, equity or debt and how long you hold it. Both fund types have their own tax rules.”
Why it matters: Many investors think they can ignore the tax angle while investing. But that mistake can eat into your returns. Knowing the rules means you can plan your investments to be more tax-efficient.
Q2. How are profits from equity mutual funds taxed?
Soumya: “Great question—and one that trips up a lot of investors. Equity mutual funds, the ones that invest at least 65% in stocks, are actually quite tax-friendly. But how much you owe depends on how long you hold them.
Here’s the simple version:
If you sell within a year, your profits are taxed at a rate of 15%. That’s called Short-Term Capital Gains (STCG).
However, if you wait over a year, you can get a great deal. The first ₹1 lakh you earn in profit is completely tax-free. Only the amount above ₹1 lakh is taxed at 10%, that’s Long-Term Capital Gains (LTCG).
Let’s say you invested ₹50,000 in a mutual fund. After 15 months, it’s worth ₹1.8 lakh. That’s a profit of ₹1.3 lakh.
Now, here’s what happens:
You pay no tax on the first ₹1 lakh.
The remaining ₹30,000 is taxed at 10%, resulting in ₹3,000.
Not bad, right?”
Quick tip: If your gains are hovering just under ₹1 lakh and you want to cash out more, consider waiting until the new financial year. You could sell a portion now and the rest after April, making full use of the ₹1 lakh exemption twice. Smart timing can save you a decent chunk.
So if you’re wondering about the tax on equity mutual funds, understanding the 15% for short-term and 10% (beyond ₹1 lakh) for long-term gains shows why equity funds remain one of the most tax-efficient investment options available.
Q3. What changed for debt mutual funds after April 2023?
Soumya: “A significant shift happened in April 2023. Previously, if you held a debt mutual fund for more than three years, you could use something called indexation. This allowed you to adjust your purchase price for inflation, which significantly reduced your taxable gains.
But now, that benefit is no longer available. Regardless of how long you hold a debt fund, your profits are taxed as per your income tax slab.”
To put that in perspective:
Let’s say you made a profit of ₹1 lakh from a debt mutual fund, and you fall under the 30% tax bracket.
Now (post-April 2023): You pay ₹30,000 in tax, no adjustments allowed.
Earlier: You could have adjusted the gain using inflation data, and potentially reduced your tax liability to ₹6,000 or even less, depending on the inflation rate and holding period.
What this means: Debt mutual funds are now taxed just like fixed deposits, as per your income slab, with no extra benefit for holding them long-term. If you’re in a higher tax bracket, this can make a big difference to your returns.
Q4. Can indexation still help anyone?
Soumya: “Yes, but only in a very specific case. The benefit of indexation is no longer available for debt mutual funds purchased on or after April 1, 2023.
However, if you had already invested in a debt mutual fund before April 1, 2023 and then held it for more than three years, you’re still eligible to claim indexation on those gains, provided you redeem them under the old rules or use previously recorded long-term capital losses to offset gains.”
Q5. Are ELSS funds totally tax-exempt?
Soumya: "No, they’re not. You get a deduction of up to ₹1.5 lakh under Section 80C for the invested amount. But the gains are taxed like any other equity fund after the 3-year lock-in."
Example: You invest ₹1.5 lakh in ELSS, and after 3 years it grows to ₹2.2 lakh. Your gain is ₹70,000. Since it’s under ₹1 lakh, there’s no tax.
Action step: ELSS helps you save taxes while building long-term wealth. A win-win when used with other 80C tools.
Q6. What happened to the Dividend Distribution Tax?
Soumya: “Earlier, mutual funds used to deduct something called Dividend Distribution Tax (DDT) before giving you any dividend. So, the tax was paid by the fund house, not by you directly.
But since 2020, that’s changed. Now, any dividend you receive is added to your total income and taxed based on your individual tax slab.”
Example:
Let’s say you receive ₹20,000 as a dividend.
If you’re in the 20% tax bracket, you’ll now pay ₹4,000 as tax on that income.
Why it matters: Dividends may seem attractive, but they can push up your tax bill, especially if you're in a higher tax slab. If you don’t need regular income, the growth option might be a smarter, more tax-efficient choice.
Q7. How does ‘grandfathering’ lower equity fund tax?
Soumya: "When the government introduced a 10% tax on long-term capital gains (LTCG) in 2018, they didn’t want to punish people who had already invested. So, they brought in a rule called ‘grandfathering.’
It basically means that if you bought your mutual fund units before January 31, 2018, you won’t be taxed on the gains you made until that date. For calculating your tax, the government considers the highest fund value on January 31, 2018, as your buying price, even if you actually bought it at a lower price."
Simple example: Imagine you bought a mutual fund in 2016 for ₹50,000. On January 31, 2018, its value had gone up to ₹80,000. If you sell it in 2024 for ₹1.2 lakh, your taxable gain will be ₹40,000 (₹1.2 lakh – ₹80,000), not ₹70,000. So you save tax on ₹30,000 worth of profit.
Who does this help? Anyone who invested before 2018 and is selling their mutual fund now can benefit from this rule, it’s like a little tax bonus for being early.
Q8. How are Systematic Withdrawal Plans taxed?
Soumya: “Think of a Systematic Withdrawal Plan (SWP) like giving yourself a monthly salary from your mutual fund. Each time you withdraw, it’s counted as if you’re selling a small part of your investment, and yes, that means taxes apply.
If it’s an equity mutual fund:
If you've held the units for less than a year, the gain on those units is taxed at 15%.
If you've held them for more than a year, the first ₹1 lakh in profit each financial year is tax-free. Any amount beyond that gets taxed at 10%.
With debt mutual funds, it doesn’t matter how long you’ve held them; any profit is simply taxed based on your income slab.”
Let’s say you set up an SWP to withdraw ₹20,000 every month from an equity fund you’ve had for over a year. Over the years, that’s ₹2.4 lakh. If the gains on those withdrawals stay under ₹1 lakh total, you don’t pay any tax.
Pro tip for retirees: This is a smart way to get regular income. Just plan it well and keep the gains below the tax threshold, and you can enjoy a tax-free cash flow.
Q9. Can I use mutual fund losses to save on tax?
Soumya: “Yes, and the smart way to do this is called capital loss harvesting. It simply means selling mutual funds that are in loss to reduce the tax you pay on your profits from other funds.
Here’s how it works:
If you have a short-term capital loss (from funds sold within a year), you can use it to reduce any capital gains, short-term or long-term.
If you have a long-term capital loss (from funds held for more than a year), it can only reduce long-term gains.
And if you don’t have enough gains this year? You can carry the loss forward for up to 8 years and use it later.”
Example: Let’s say you made a ₹50,000 short-term loss and a ₹70,000 long-term gain. After capital loss harvesting, your taxable gain becomes just ₹20,000, which means you only pay tax on that ₹20,000, not the full ₹70,000.
Quick tip: Before the financial year ends, review your portfolio. Selling poor performers now could mean less tax when you file.
Q10. What are the key mutual fund tax updates in Budget 2025?
Soumya: “There are a few important things to note from this year’s Union Budget:”
The ₹1 lakh LTCG exemption on equity mutual funds stays the same.
That means long-term capital gains up to ₹1 lakh in a financial year are still completely tax-free.Foreign mutual funds are now taxed like debt funds.
So, whether you hold them short- or long-term, the profits will be added to your income and taxed as per your slab rate, just like fixed deposits or other debt funds.Capital gains statements from AMCs will be standardised.
This makes life much easier at tax time. You’ll get one clear report from the mutual fund company that shows all your profits and taxes, ready to plug into your ITR.
Q11. My mutual fund data shows up in the Annual Information Statement (AIS). Do I still need to report it?
Soumya: “Yes, 100%. Just because your transactions appear in the AIS doesn’t mean you don’t have to file them in your ITR.
Also, the AIS can sometimes have missing or incorrect data, so don’t blindly rely on it. Always cross-check it with your actual mutual fund statements and ensure your tax filing is accurate.”
Bottom line: The AIS is just a tool; it doesn’t replace your responsibility. Double-check everything and report gains correctly to avoid notices or penalties.
Don’t Let Taxes Eat Your Gains
After everything we’ve unpacked about mutual fund taxes, here’s the bottom line:
Taxes don’t have to be overwhelming, but ignoring them can cost you more than just money; it can set your financial goals back by years.
The good news? You have more control than you might think. From timing your redemptions wisely to using capital loss harvesting to your advantage, small moves can lead to significant savings. That ₹1 lakh LTCG exemption? It’s more than just fine print; it’s a real opportunity. SWPs can offer steady, tax-efficient income. And ‘grandfathering’ isn’t just jargon, it’s a genuine benefit for long-term investors.
But there’s a catch. Tax rules keep changing, and your financial goals are unique.
That’s where expert advice comes in. A certified financial professional on Pyng can help you create a tax-smart investment plan tailored to your needs, so you can grow your wealth without letting taxes slow you down.
So don’t wait. Plan wisely. Because every rupee saved in tax is one more rupee working for your future.
Disclaimer: This article includes insights from certified financial expert Soumya Saswat Mishra and is intended to offer reliable guidance on mutual fund taxation in India. However, tax laws are subject to change, and individual financial situations vary. While the advice
