How much tax is levied on mutual fund redemption?

The stock market is rising and so is the value of mutual funds. So if you are planning to redeem some of your mutual funds for some purchases then you should know about the taxes that would have to be paid on redemption. Mutual funds are considered a good tool for wealth creation in the long term. The return on investment in it, i.e., profit, falls under the purview of income tax. According to tax law, it is considered income, and capital gains tax must be paid on it. The calculation of tax and the duration of your holding will depend on the type of fund. The first and most important category of mutual funds is equity-oriented mutual funds.

Under the income tax law, mutual fund schemes that invest 65 percent or more of their assets in the equities of listed companies in India are called equity-oriented mutual funds. When withdrawing money from equity mutual funds, tax is levied similar to that on shares.

Investment in equity mutual funds for more than 12 months is considered long term. In this case, if you withdraw money after investing for more than 12 months, long-term capital gains tax will be applicable. Profit of up to one lakh rupees in a financial year, is tax free. Beyond that, a 10 percent tax is imposed on the profit. If the holding period is less than 12 months, i.e., if you withdraw the investment in less than 12 months, the profit is considered short-term capital gains, and a 15 percent short-term capital gains tax is applied.

Changes have been made in the rules related to taxes on mutual funds through the Finance Act of 2023. A new category has been created, which includes all mutual fund schemes that invest less than 35 percent in the equity of Indian companies. This category includes debt mutual funds, gold/silver mutual funds, foreign mutual fund schemes, and Indian mutual fund schemes investing in shares of foreign companies. These schemes primarily invest in bonds, debentures, and other fixed-income securities.

If you have invested in these mutual fund schemes on or after April 1, 2023, or plan to invest in the future, any profit generated will be considered short-term capital gains, regardless of the holding period. This profit will be included in your income and taxed at the applicable rate based on your income slab.

If your investment in the Debt Mutual Fund is on or before March 31, 2023, you will continue to benefit from indexation. In this condition, if you sell the units of the Debt Fund after holding them for more than 36 months, long-term capital gains tax at a rate of 20 percent will be applicable after considering the indexation benefit. Indexation helps reduce the taxable amount. If you sell before 36 months, short-term capital gains tax will be applicable, and tax on profits will be based on your tax slab.

All mutual fund schemes that invest more than 35 percent but less than 65 percent in the equity of Indian companies fall into the third category. Some hybrid funds fall into this category. If you invest in these schemes for more than 36 months, it will be considered long term, and a 20 percent tax on profits will be applied after considering the indexation benefit. If short-term capital gains occur, it will be treated as regular income and taxed at the slab rate.

Under Section 54F, long-term capital gains tax can be saved by purchasing a home. For this, you need to invest not only the profit but the entire amount received from selling the units. You must buy a house within 2 years of selling or construct a house within 3 years. Under Section 54F, tax savings will apply only on capital gains up to 10 crores. Beyond that, tax must be paid on the profits.