18/07/2026
Income from Mutual Funds (MFs) and Equity Shares in India generally falls into two distinct categories for taxation purposes: Capital Gains (when you sell your holdings for a profit) and Dividend Income (payouts received while holding the assets).
Based on the recent Union Budget updates (effective for FY 2024-25 and onwards), here is how your income is categorized and taxed:
1. Capital Gains on Equity Shares & Equity-Oriented MFs
A mutual fund is considered "equity-oriented" if it invests at least 65% of its assets in domestic equities. The tax you pay is determined by your holding period.
LTCG Exemption: The first ₹1.25 lakh of your total Long-Term Capital Gains (from equity shares and equity mutual funds combined) in a financial year is completely tax-free.
No Indexation: LTCG on equity assets is calculated directly on the profit without the benefit of indexation.
2. Capital Gains on Debt Mutual Funds
Debt funds are taxed differently than equity funds, and the treatment depends entirely on when you purchased the units.
Bought on or after April 1, 2023: All gains, regardless of how long you hold the fund, are classified as Short-Term Capital Gains. They are added to your total income and taxed at your applicable income tax slab rate.
Bought before April 1, 2023: If you held the units for more than 24 months, the gains are taxed at a flat 12.5%.
3. Dividend Income
Whether you receive dividends directly from holding equity shares or as payouts from a mutual fund, the tax rules are identical:
Taxed at Slab Rate: Dividends are fully taxable in your hands. The amount is added to your total income under the head "Income from Other Sources" and taxed according to your applicable income tax slab rate.
TDS (Tax Deducted at Source): If your total dividend income from a single company or Asset Management Company (AMC) exceeds ₹5,000 in a financial year, a 10% TDS is deducted before the payout reaches your account.
