HOW DOES TAXATION ON MUTUAL FUNDS WORK?

According to Indian Tax laws, your income will fall under one or more of these five heads of Income:

 - Income from Salary

 - Income from Property

- Profits and gains from Business or profession

- Capital Gains 

- Income from Other sources.

For Mutual funds , we are concerned with the fourth and fifth heads of the Income, " Capital Gains" and "Income from Other Sources".

The Taxation Rules.

Dividend :

    When you invest in Mutual Funds, You have an option to pick between dividend plan and growth plan. If you've opted for the former, The dividend that you receive will be taxed under the head, "Income from other sources".This income, along with any savings bank account interest and fixed deposit interest that you might have, is taxed at the slab rate applicable to you. Pretty straight forward.

- The type of mutual fund (Equity / Debt / Hybrid) 

- The duration that one has held on to the fund (a.k.a Holding period, in simple words - the time period between date of purchase and date of sale of units ) 

Equity Funds :

    Short term capital gains are taxed at a flat rate of 15%, irrespective of overall income.Long-term capital gains are exempt up to Rs.1,00,000. Beyond this, long term capital gains are taxed at 10% .

Debt Funds :

    Short term capital gains are taxed at normal slab rate applicable to you.Long-term capital gains are taxed at 20% with the benefit of indexation. Indexation is the method of taking inflation into account,from the time of purchase to the time of sale. 

Hybrid Funds : 

    Hybrid funds are treated as equity funds if the equity exposure is greater than 65%. Else they are treated as debt funds. Taxation rules are then applicable as explained above.