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How are mutual funds taxed?

Selling your equity investments after 12 months is more tax efficient

What is the minimum time to sell MF to avoid income tax?
- Umed Sinha

You cannot avoid income tax on gains from selling your mutual fund investments.

Gains on equity mutual funds held for more than 12 months are treated as long-term capital gains (LTCG) and taxed at 10 per cent. However, long-term capital gains from equities are exempt up to Rs 1 lakh in a financial year.

If you sell your investment in equity funds within 12 months, the gains on selling them are treated as short-term capital gains (STCG) and taxed at 15 per cent.

Dividends from equity funds are paid after deducting a Dividend Distribution Tax (DDT) of 10 per cent plus surcharge and cess.

Gains realised from non-equity mutual funds are treated as LTCG if they are held for more than 36 months and as STCG if the investment is sold within 36 months. The LTCG is taxed at 20 per cent after providing the indexation benefit on cost. Whereas, STCG from non-equity funds are added to the income and taxed as per the applicable income tax slab. Dividends from debt funds are liable to a DDT of 25 per cent plus surcharge and cess, which is deducted before paying the dividend.

An additional tax of 10 per cent is levied if your dividend income exceeds Rs 10 lakh in a year.

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