5 min read • Published 21 Jan 25
How to Calculate Tax on Mutual Fund Redemption?
Table of Contents
The taxation of mutual funds during redemption will be based on the gains generated with this transaction and their holding period. The gain from redemption of mutual funds is considered under the umbrella of capital gains (from different investments). Understanding how to calculate tax on mutual fund redemption can help investors plan their tax liability. The taxation norms for these capital gains were updated in the Union Budget 2024.
What is Mutual Fund Redemption?
The sale of mutual fund units is commonly termed redemption.
- When investors invest in mutual funds through a one-time amount or Systematic Investment Plan (SIP).
- Based on the Net Asset Value (NAV), units will be allotted to their folio.
- When investors sell these units, they receive an amount after multiplying the number of units with the NAV.
- The positive difference between the invested amount and this redemption proceeds is the capital gain.
Tax on Mutual Funds
The tax liability arises in mutual funds when an investor earns capital gain during redemption or earns dividend income under the Income Distribution cum Capital Withdrawal (IDCW) option.
- Dividend income
When an investor gains a dividend of more than ₹5000 in a financial year, the mutual fund house will deduct the Tax Deducted at Source (TDS) at 10%.
- Capital Gains
The tax on capital gains ranges from 10% to 20% at different rates based on the nature of investments in a mutual fund scheme and holding period. Moreover, some categories are taxed at the tax slab rate of an investor’s total income.
Previously, the capital gains from debt mutual funds were charged with indexation benefit, but it was removed in the Union Budget 2024. Under indexation, the purchase price was calculated with the inflation effect.
How to calculate Tax on Mutual Fund Redemption
At the time of redemption, the tax applicable on the transaction will be as follows:
| Particulars | STCG* | LTCG* |
| Equity Funds | 20% (Holding = 12 months or less) | 12.5% (Holding = more than 12 months)Exemption for gains up to ₹1.25 lakhs |
| Specified Mutual Funds (investing 65% or more in Debt and Money Market Assets) | At investor’s income tax slab rate (no specific holding period) | At investor’s income tax slab rate (no specific holding period) |
| All Other Funds (not included in above categories) | At investor’s income tax slab rate (Holding = 12 months or less) | 12.5%(Holding = more than 12 months) |
* The tax rates are applicable for resident individual investors and the transaction on or after July 23, 2024.
Source: Association of Mutual Funds in India
Understanding this tax structure becomes crucial for an investor to ascertain their tax liability and plan their redemption accordingly. Moreover, the holding period for these categories indicates that the regulator is willing to encourage investors for long-term investments. Therefore, investors can plan their asset allocation based on their financial objective’s time horizon and tax implications.
Hypothetical Example of How to Calculate Tax on Redemption of Mutual Fund
These 3 cases can potentially simplify the tax calculation process for the investors.
| Example No. | Transaction details | Tax liability |
| 1. | Fund: Multi-cap fundsInvestment date = January 10, 2023Investment amount = ₹5 lakhs | Long-Term Capital Gains = ₹1.5 lakhsup to ₹1.25 lakhs: NILRemaining gains = ₹25,000Tax = ₹3,125(25,000*12.5%) |
| Redemption date = September 10, 2024Redemption amount = ₹5 lakhsHolding period = 20 months | ||
| 2. | Fund: Value fundsInvestment date = December 20, 2024Investment amount = ₹1.75 lakhs | Short-Term Capital Gains = ₹52,500Tax = ₹10,500 (52,500*20%) |
| Redemption date = August 20, 2024Redemption amount = ₹2.275 lakhsHolding period = 8 months | ||
| 3. | Fund: Aggressive hybrid mutual fund Investment date = July 1, 2023Investment amount = ₹5 lakhs | Long-Term Capital Gains = ₹1 lakhsTax = ₹12,500 (1 lakhs*12.5%) |
| Redemption date = July 23, 2024Redemption amount = ₹6 lakhsHolding period = more than 12 months |
These examples of equity and other funds may help investors ascertain how tax is charged. Such gains are categorised under the head of ‘Income from Capital Gains’ while filing income tax returns.
Conclusion
Mutual fund redemption, that is, the sale of mutual fund units, will attract tax liability based on its holding period. This liability is categorised under short-term and long-term. Understanding how to calculate tax on the redemption of mutual fund units will help investors plan their sales and invest their funds based on their financial horizon. Inventors can also consult their tax advisor for potential implications.
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Q: What is LTCG in mutual funds?
Long-term capital gain, or LTCG, is a term prescribed for gains arising from mutual funds held for a minimum of more than a year. The tenure may differ based on the assets in the scheme portfolio of mutual funds.
Q: What is the indexation effect removed in Budget 2024?
When an asset price is adjusted with the inflation effect, it is known as indexation. It helps reduce the base for overall tax liability and was previously applicable to debt mutual funds. However, it was removed in the Union Budget 2024.
Q: Is TDS applicable to mutual fund transactions?
Yes, TDS will be applicable on capital gains and dividends for NRIs and only on dividends for resident individuals or domestic companies. The common rate of TDS on dividends is 10% and will be charged by the fund house before distribution if the dividend exceeds ₹5000.
Q: What are specified mutual funds?
Based on the amendments in Budget 2024, the funds investing more than or equal to 65% of their assets in the money or debt market instruments will be known as specified mutual funds.
Q: How are debt mutual funds taxed?
The schemes investing 65% or more in debt and money market assets will be taxed as per the income tax slab rate of an individual for any tenure holding. However, scheme investing below 65% will be taxed at a slab rate for the short term. For the long-term, a tax of 12.5% (without indexation) for transfer after July 23, 2024.
