Mutual Funds Tax Benefit
08 Nov 2021

Mutual Funds Tax Benefit

Know the tax benefits of investing in Mutual Funds

Key Takeaways

  • Investing in Tax-Saving Mutual Funds allows you to get tax deductions of up to INR 1.5 Lakh.
  • ELSS Mutual Funds is the best type of mutual fund offering tax benefits
  • Long-term Capital Gains not exceeding 1 lakh in Equity Funds are non-taxable.
  • Dividends earned on equity and debt Mutual Funds investments are exempt from tax in the hands of the investor.
  • You only pay tax when you sell the units, not when they are in the holding period.

Mutual Funds investment is a popular choice amongst investors because of the returns they generate. But choosing Mutual Funds schemes after only looking at their past returns does not suffice. Any income you earn in India, more often than not, is taxable. Essentially, you have to pay taxes on the returns you earn from Mutual Fund investments. However, as a tax-paying investor, you can reap Mutual Fund Tax Benefits. Keep reading to know how to gain tax benefits of investing in Mutual Funds.

Mutual Fund Tax Benefits

It is imperative to understand the taxes you are liable to pay before investing in any scheme. Yes, you could potentially earn higher returns, but you have to pay taxes on your gains, which, in turn, impacts your overall returns. Also, tax is only applicable when you redeem the investment. As long as you stay invested, you are not liable to pay any tax. Below are the rules governing income tax on Mutual Funds in India.

Mutual Fund Tax Benefit on Equity Funds

Equity Funds attract two types of taxes – dividend and capital gains. Dividends paid on equity Mutual Fund investments are tax-free in the hands of the investor. However, the Asset Management Company (AMC) is liable to pay a Dividend Distribution Tax (DDT) at a specified rate.

Capital Gains are further categorised into two types – Long and Short Term Capital, and the tax on it is known as LTCG and STCG. If you redeem the Mutual Fund units within 1 year, you have to pay a short-term capital gains tax of 15% plus taxes. LTGC of up to INR 1 Lakh is exempt from tax. However, LTGC exceeding INR 1 Lakh are taxed at 10% + taxes, without indexation benefits.

80C ELSS Funds: The Equity Linked Savings Scheme (ELSS) is the only Mutual Fund scheme that falls under Section 80C of the Income Tax Act, 1961, under which you can get tax deductions of up to INR 150,000 per annum. For investors falling under the highest income tax slab of 30%, this translates to Mutual Fund tax benefits of up to INR 46,800.

Mutual Fund Tax Benefit on Other Fund Schemes

Dividend earned in Non-Equity Mutual Funds such as debt funds is exempt from tax, while the AMC has to pay DDT.

As for capital gains, the minimum holding period for LTCG in non-equity funds is 3 years. You have to pay STCG tax per your tax bracket if you sell your funds within 3 years of investment. Similarly, LTGC tax on redeeming investments are 3 years are taxed at 20% with applicable indexation benefits.


Now that you know the tax benefits of investing in Mutual Funds, you can make informed investment decisions. You can invest in Mutual Funds via lump sum or in instalments with Systematic Investment Plans. Enjoy benefits like portfolio diversification, compounding benefits, and more.

Download digibank by DBS on your smartphone, register and choose any tax-saving options from the menu. Also, you can open a savings account with us.

*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.