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Tax liability on debt funds

If you sell your investments in debt funds before three years, you will have to pay short-term capital gains tax

What is the tax liability on income/appreciation from debt and hybrid funds?
- Raveendran

Dividend (or income) from debt and hybrid mutual funds are tax-free for investors. However, mutual funds pay a dividend distribution tax (DDT) on dividends declared. In that sense the tax is already paid on it.

If you sell your investments in debt funds before three years, you will have to pay short-term capital gains tax. Short-term capital gains are added to the income and taxed as per the Income Tax slab applicable to the investor. If investments are sold after three years, you will have to pay a long-term capital gains tax of 20 per cent with indexation benefit.

The taxation on hybrid funds will depend on their exposure to equity. If you are investing in an equity-oriented hybrid fund that invests at least 65 per cent of the corpus in equity, it will be taxed like an equity funds. If you sell your investment after a year, you don't have to pay any taxes. This is because long-term capital gains tax on equity investments held over a year is nil. If investments are sold before a year, you will have to pay a short-term capital gains tax of 15 per cent. Debt-oriented hybrid funds (where equity exposure is less than 65 per cent) are taxed like a debt fund.

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