Gains from Mutual Funds. How are they taxed?

Mutual Funds is a financial product that pools money of different individuals and invests on their behalf into various assets such as equity, debt or gold as per the objective of the scheme. Basically speaking, there are three types of mutual funds, equity oriented, debt oriented and Gold.

What are the different Incomes from Mutual funds?

Here are the various forms of Income one can receive from a mutual funds.

Interest Income on Mutual Funds - Taxed on the hands of the Mutual Fund: (Section 115R(2) of the Income tax Act)

For Individuals and HUF (Debt- Instruments): 25%

For Other persons including Companies (Debt- Instruments) : 30%

For individuals (Equity oriented) : 10%

For Individuals (Others) : 25%

For Other Persons including Companies (others) : 30%

Income from sale of Mutual Funds: (Capital gains taxed on the hands of Investor:

Section 112 on Long Term Capital Gains

Long-term capital gains on stocks and equity mutual funds are not taxed. Long-term capital gains from debt mutual funds are taxed at 20% with indexation and 10% without indexation.

Section 111A on short term Capital Gains

But short-term gains for all mutual funds are taxed at 15%.

Income by the way of gain/loss in the Market Value of the fund:

These type of incomes are not actually paid by the mutual funds to the investors, rather they increase or decrease the market value of the investment and would only be realized upon the sale of such funds.

These incomes are technically not derived by the company, hence not chargeable to tax. The investor can increase or decrease the value of his investments in his books and create a reserve/provision for the respective gain/loss on market value of the mutual funds.

Needless to say, such gains/losses would not be taxable to the entity as and when they arise, but would be taxable once the asset is sold and capital gains arises on such sale.