Tax on Equity Mutual Funds in India: A Simple Guide

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Introduction

An equity mutual fund is a scheme designed for investors interested in equity stocks. According to SEBI Mutual Fund Regulations, an equity mutual fund scheme must invest at least a portion of its assets in equities and equity-related instruments. To help you make informed investment decisions, we have curated this guide on equity mutual fund taxation so that you can better manage your mutual fund (MF) portfolio.

Types of Equity Mutual Funds in India

Equity mutual funds are a popular choice among retail investors, as various fund houses focus on different categories and risk levels. As an investor, you can build your MF portfolio by investing in these types of equity mutual funds:

• Large-Cap Equity Funds – These funds invest a significant portion of their corpus in companies with large market capitalisation. They are known for their stability and sustainable returns over time.
• Mid-Cap Equity Funds – These funds invest in stocks of mid-sized or developing companies.
• Small-Cap Equity Funds – These funds invest in young companies with high growth potential, making them riskier but potentially more rewarding.
• Equity-Linked Savings Scheme (ELSS) – This type of equity mutual fund is an attractive option for investors looking to reduce their tax liability while earning higher returns.

Additionally, some equity funds invest in specific sectors. However, to simplify investment decisions and portfolio management, investors can use a DBS Treasures premium account, which provides access to a dedicated team of relationship managers and wealth experts to help you understand equity mutual fund taxation and more.

Understanding Capital Gains Tax on Equity Mutual Funds

Equity mutual fund taxation impacts investor returns, with different tax rates based on the holding period. The tax on equity mutual funds is classified into short-term and long-term capital gains tax.

• Short-Term Capital Gains (STCG) Tax on Equity Mutual Funds

Selling equity mutual fund units within one year incurs 20% STCG tax under the Income Tax Bill 2025. This higher rate increases tax liability for short-term investors.

• Long-Term Capital Gains (LTCG) Tax on Equity Mutual Funds

For units held beyond one year, LTCG tax is now 12.5%, affecting long-term investors. Understanding equity taxation in mutual funds helps in planning tax-efficient investments.

• Dividend Taxation on Equity Mutual Funds

Under the latest equity mutual fund taxation rules, dividends from equity mutual funds are taxed as per the investor’s income slab. 

Key Tax Rules:

• Taxable as per Slab Rate: Dividend income is added to total income and taxed accordingly.
• TDS on Dividends: If dividend income exceeds INR 5,000 in a financial year, 10% TDS is deducted.

Investors in higher tax brackets face increased liability, making it essential to understand equity taxation in mutual funds for better financial planning.

Tax-Saving Strategies for Equity Mutual Fund Investors

Optimising equity mutual fund taxation can help investors lower tax liability and improve returns. Here are some key strategies:

1. Tax-Loss Harvesting

Offset tax on equity mutual funds by selling investments at a loss to reduce taxable capital gains. The sold investments can be repurchased later to maintain market exposure.

1. Utilise the ₹1 Lakh LTCG Exemption

LTCG up to ₹1 lakh per financial year is tax-free. Investors can redeem investments strategically within this limit to avoid taxation.

1. Choose Growth Over Dividend Option

Dividends are taxed at the investor’s slab rate, making them less tax-efficient. The growth option allows deferring tax until redemption, reducing overall liability.

1. Use Systematic Withdrawals

A Systematic Withdrawal Plan (SWP) spreads redemptions over time, keeping capital gains within lower tax brackets and optimising tax efficiency.

By leveraging these strategies and understanding equity taxation in mutual funds, investors can enhance post-tax returns.

How to File Taxes on Equity Mutual Fund Gains

1. Report Gains & Dividend Income:

• File returns via the Income Tax e-Filing Portal.
• Declare capital gains under "Capital Gains" and dividends under "Income from Other Sources."

1. Optimise Your MF Portfolio for Tax Efficiency:

• Structured redemptions and a diversified MF portfolio help manage tax liability.
• Premium banking services like DBS Treasures Premium Account provide tax-efficient wealth management and personalised financial guidance.

1. Maintain Proper Records:

• Keep transaction details and investment statements ready for smooth tax filing.

By managing tax on equity mutual funds efficiently, investors can reduce liabilities while maximising post-tax returns.

Conclusion

Understanding equity mutual fund taxation is crucial for optimising returns and ensuring compliance. Investors should plan for STCG and LTCG taxes while leveraging strategies like tax harvesting and portfolio diversification. Maintaining accurate records and using services like DBS Treasures Premium Account can streamline tax planning and enhance financial efficiency. By staying informed and proactive, investors can effectively manage their tax on equity mutual funds while maximising wealth growth.

*The information provided in this blog is subject to change, and their applicability may vary based on individual circumstances. Readers are advised to consult a qualified financial advisor or tax professional before making any investment or tax-related decisions.

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