Tax on Mutual Funds

Section 2(42A): A unit of mutual fund is treated as short-term capital asset if the same is held for less than 12 months. The units that are held for more than 12 months are treated as long-term capital asset.

Section 10(38): Short-term capital gains on all equity-oriented funds are chargeable to tax @10% (plus the education cess, applicable surcharge). However, such securities transaction tax shall be allowed as rebate under Section 88E of the Act, if the transaction indicates business income.

The long-term capital gains on debt-oriented funds are subject to a tax @20% of capital gain after allowing indexation benefit or at 10% flat without indexation benefit, whichever is lesser

All Short-term capital gains on debt-oriented funds are subject to a tax at the tax bracket applicable (i.e. marginal tax rate) to the investor.

Section 112: Capital gains not covered by exemption u/s 10(38), chargeable on transfer of long-term capital assets shall be subject to following tax rates:

• For Resident Individual & HUF - 20% plus surcharge, education cess.
• For Partnership firms as well as Indian companies - 20% plus surcharge.
• For Foreign companies - 20% (no surcharge).

Capital gains are computed after taking into consideration the cost of acquisition as adjusted by the Cost Inflation Index, notified by Central government.

Unit holders can opt for being taxed at 10% (along with applicable surcharge, education cess) without the cost inflation index benefit or 20% (along with applicable surcharge) with cost inflation index benefit, whichever is beneficial.

U/s 115AB of the Income Tax Act, 1961, the long term capital gains on units, purchased in foreign currency by an overseas financial, and held for a period greater than 12 months, will be charged at the rate of 10%. Such gains will be calculated without indexation of cost of acquisition. No surcharge is applicable for taxes U/s 115AB, for corporate bodies.