Mutual funds investments are one of the most tax friendly investment options available to Indian investors. The taxation which shall be applicable only when investor sells mutual units is as below:
Tax on equity mutual funds (funds which have at least 65% equity allocation in their investment portfolios). The minimum holding period for long term capital gains in equity funds is one year. Short term capital gains (if the units are sold before one year) in equity funds are taxed at the rate of 15% plus cess. Long term capital gains tax in equity funds is 10% plus cess provided the gain in a financial year is over Rs 1 Lakh. Long term capital gains upto Rs 1 Lakh per annum is totally tax free.
Tax on debt mutual funds - The minimum holding period for short term capital gains in debt funds is 3 years. Short term capital gains (if the units are sold before three years) in debt mutual funds are taxed as per applicable tax rate of the investor. Therefore, if your tax rate is 30% then short term capital gains tax on debt fund is 30% + plus cess. Long term capital gains of debt fund are taxed at 20% with indexation. Indexation benefits reduce the tax obligation of debt fund investor considerably compared to investments in bank FDs and many small savings schemes.