Mutual Funds Taxation Rules FY 2020-21 (AY 2021-22) | Capital Gains Tax Rates Chart

Capital asset typically refers to anything that you own for personal or investment purposes. It includes all kinds of property; movable or immovable, tangible or intangible, fixed or circulating.

Capital assets are further classified as Financial Assets and Non-Financial Assets. Financial assets are intangible and represent the monetary value of a physical item.

Stocks (Shares) and mutual funds are the best examples of Financial Assets.

The profit (if any) that you make on your mutual fund investments when you redeem or sell the MF units is referred to as Capital Gains. It can be a Short Term Capital Gain (STCG) or a Long Term Capital Gain (LTCG) depending upon the ‘Period of Holding’. The tax that is applicable on these profits is known as ‘Capital Gains Tax’.

As per the Budget 2020 proposals, Dividend Distribution Tax (in companies’ hands) will be abolished. TDS will be levied on dividend income from Mutual Fund units, with effective from April, 2020.

In this post let us understand: What are the factors that determine the tax status of mutual funds? What are the tax implications on mutual fund investments? What are the Budget 2020-21 proposals related to Mutual Funds Taxation? Is TDS applicable on Mutual Fund Capital Gains from FY 2020-21? Will TDS apply to Mutual Fund Dividends from AY 2021-22? What are the Mutual funds taxation & capital gains tax rates on mutual funds for Financial year 2020-2021 (Assessment year 2021-2022).

Factors determining the tax status of mutual funds

The capital gains tax on mutual fund withdrawals is based on the factors as below;

  • Residential Status
  • Fund Type  (whether the fund is an Equity-oriented fund (or) a Non-Equity Oriented Fund)
  • Holding Period (Duration of your investment)
Mutual Funds Taxation factors Capital gains LTCG STCG
Mutual Fund Taxation Factors

1. Residential Status & Mutual Funds Taxation

The capital gains tax rates are determined based on the residential status of an individual / investor. Residential status can be either ‘Resident Indian’ or ‘Non-Resident India” (NRI). (Related article : ‘Residential Status online calculator.’)

2. Type of Funds & Mutual Funds Taxation

What are Equity-oriented Mutual Funds? – MF schemes that invest at least 65% of its fund corpus into equity and equity related instruments are known as equity mutual funds. Examples are : Large cap, ELSS tax saving funds, Mid-cap, Balanced funds (equity oriented), Sector funds etc.,

What are Non-Equity Mutual Funds? – MF schemes that hold less than 65% of their portfolio in equities and equity related instruments are known as Non-Equity Funds / Debt funds. Examples are : Liquid Mutual funds, Money Market funds, Gold funds, Infrastructure debt funds, MIPs, FMPs, Hybrid funds (Debt oriented) etc.,

3. Period of Holding & Capital Gains on Mutual Funds

Capital gains on Mutual funds could be either long term capital gains or short term capital gains, depending on your investment horizon.

  • Long Term Capital Gains
    • If you make a gain / profit on your investment in a Equity Mutual Fund scheme that you have held for over 1 year, it will be classified as Long Term Capital Gain.
    • If you make a gain / profit on your investment in a Non-Equity Mutual Fund scheme (or in a Debt Fund) that you have held for over 3 years, it will be classified as Long Term Capital Gain.
  • Short Term Capital Gains
    • If your holding in a Equity mutual fund scheme is less than 1 year i.e. if you withdraw your mutual fund units before 1 year, after making a profit, then the profit will be considered as Short Term Capital Gain.
    • If you make a gain / profit on your Debt fund (or other than equity oriented schemes) that you have held for less than 36 months (3 years), it will be treated as Short Term Capital Gain.

Budget 2020 & Mutual Funds Taxation Rules

One of the important proposals of Budget 2020 is ‘abolition of Dividend Distribution Tax’ in companies hands. As DDT will not be paid by the companies, dividend income henceforth (from April 2020) will be taxed and paid by investor, at applicable individual tax slab rates.

Also, if dividend income is in excess of Rs 5,000 then such income will be subject to TDS @ 10%.

(Considering the pandemic and resultant lockdown affecting all sectors of the economy, the Government of India has reduced the rates of Tax Deducted at Source and Tax Collected at Source by 25% on several transactions till March 2021. So, the TDS on dividend income is 7.5% from 14-05-2020 to 31-03-2021.)

“A new section 194K to provide that any person responsible for paying to a resident any income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or units from the administrator of the specified by undertaking or units from the specified company shall at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax there on at the rate of ten per cent. It may also be provided for threshold limit of Rs 5,000/- so that income below this amount does not suffer tax deduction…. (Source : The Finance Bill 2020)

If you are in say 20% IT slab, you receive Rs 10,000 as dividend income (applicable to Growth or Dividend options of any Fund) then your Mutual Fund AMC will deduct TDS @ 10% and you need to pay the remaining tax dues when you file your Income Tax Return.

As of now, there is a confusion, whether this TDS is applicable on Capital Gains (on sale/transfer of MF units by Resident Indian) or not. I believe that TDS may not be applicable on Capital Gains. But, let’s wait for more clarity from the Govt/CBDT.

It has been clarified by the CBDT that 10% TDS is on Dividend Payments only and it is not applicable on Capital Gains (on Sale or transfer of mutual fund units).

CBDT clarification Whether TDS @ 10% is applicable on Mutual Fund Capital Gains Section 194k
10% TDS on Mutual Fund Dividend only | No TDS on MF Capital Gains

Mutual Funds Taxation Rules FY 2020-21 | Latest Mutual Funds Capital Gains Tax Rates AY 2021-22

Capital Gains Tax Rates on Mutual Fund Investments of a Resident Indian for FY 2020-21 are as below;

  • The STCG (Short Term Capital Gains) tax rate on equity funds is 15%.
  • The STCG tax rate on Non-Equity funds (or) Debt funds is as per the investor’s income tax slab rate.
  • The LTCG (Long Term Capital Gains) tax rate on equity funds is 10% on LTCG exceeding Rs 1 Lakh.
  • The LTCG tax rate on non-equity funds is 20% (with Indexation benefit)
Mutual Fund Taxation rules - Resident Indian FY 2020-21
Mutual Fund Taxation rules – Resident Indian – FY 2020-21

Capital Gains Tax Rates on NRI Mutual Fund Investments for the Financial Year 2020-21 (Assessment Year 2021-22) are as below;

Capital Gains Tax Rate on Sale of Mutual Fund units by NRI FY 2020-21 AY 2021-22
Mutual Fund Capital Gain Tax Rates for NRIs FY 2020-21 / AY 2021-22
  • The STCG tax rate on equity funds is 15%. In case the short-term capital gains were on account of listed equity shares which were sold on a stock exchange or equity-oriented mutual fund, then the provisions for tax calculations as per section 111A of the Income Tax Act provide that 15% tax is payable by non-residents on a flat basis without getting any benefit of the initial exemption limit of Rs 2,50,000. Unfortunately, the basic exemption limit is available only for resident individuals and HUFs, and not for any other entities. If the short-term capital gains is not on account of either of the two types of sale mentioned above, then the benefit of initial exemption will be available even to non residents.
  • The STCG tax rate on Non-Equity funds (or) Debt funds is as per the investor’s income tax slab rate. (Tax Deducted at Source – TDS @ 30% is applicable)
  • The LTCG tax rate on equity funds is 10%, on LTCG exceeding Rs 1 Lakh.
  • The LTCG tax rate on non-equity funds is 20%on listed mutual fund units and 10% on unlisted funds.

Taxation of Mutual Fund Dividends FY 2020-21

With effective from 1st April 2020, the dividend income received by investors from mutual funds (Equity or Debt funds) will be subject to TDS @ 10%. This TDS is applicable if such income is in excess of Rs 5,000 u/s 194K.

Also, such dividend income is a taxable income in the hands of investor as per his/her income tax slab rate.

NRI Mutual Fund Investments & TDS Rate 

Below are the TDS rate applicable on MF redemptions by NRIs for AY 2021-22.

NRI Mutual Fund Redemptions TDS Rates Capital Gains FY 2020-21 AY 2021-22

Hope this post is informative. Do you check your capital gains statement(s) every year? Do you include your capital gains taxes (if any) in Income Tax Returns (ITR). Share your comments.

Continue reading :

  1. Mutual Funds Taxation Rules FY 2023-24 (AY 2024-25) | Capital Gains Tax Rates Chart
  2. New Income Tax Slab Rates Vs Old Tax Regime | Which one is better? | Budget 2020
  3. Income Tax Slab Rates for FY 2020-21 / AY 2021-22 | Budget 2020 Key Highlights
  4. How to set-off Capital Losses on Mutual Funds, Stocks, Property, Gold, Bonds & Debentures?
  5. Top 15 Best Mutual Funds 2021 & beyond | Top Performing Equity Funds

(Above rules are as per Budget 2020 proposals) (Post first published on 02-February-2020)

About The Author

  • g venkatesan says:

    very good analysis

  • Ashok Kumar says:

    Dear Sir,
    While submitting ITR 2 for AY 2021-22, I am getting an Error message: In Schedule OS, Sl. No. 10 the quarterly break up of Dividend Income (i ii iii iv v) is not equal to [1a – DTAA Dividend -System calculated value at 3aii] of Schedule OS”
    Also, another problem I am facing is that in Schedule TTI, clause 19: Do you at any time during the prev year….! I am selecting the checkbox ‘No’ but in summary, the checkbox get automatically change to “Yes”. Can you please help me with what could be the problem?
    The ironic part is that the online utility indicates no error on validation. However, this error pops up while verification.

  • sangamesh says:

    Good compilation. In my view dividend should qualify for deduction U/s 80TTA and 80TTB, do we have any clarity on this While the Govt want us to invest in MF, the dividend earning is not on par with bank interest, though it is in the nature of interest. Further, in case of corporate dividend it is a clear case of double taxation

  • Namrata says:

    Dear Sreekanth,

    So does this mean that 15% TDS for NRIs on STCG from Equity Mutual Funds cannot be claimed for refund at all no matter which income tax slab the person falls in (Assuming income in India does not exceed either 2.5L or say max 5L)? Is this the new rule applicable for Financial Year 2020-21?

    • Sreekanth Reddy says:

      Dear Namrata,
      For a resident, if the total income (before including capital gain) falls below the minimum tax exemption limit, the long/short term capital gain can be reduced by the amount of such shortfall.

      In the case of non-residents, the above can be done only for short-term gains on non-equity funds (debt funds, gold funds etc).
      Long-term capital gains on the sale of equity/debt funds or STCG on the sale of equity funds can’t be revised downwards even if your total income is short of minimum tax exemption limit.

      Short-term capital gains from equity-oriented investments are subject to a TDS of 15% (excluding cess). NRIs, unlike resident individuals, do not have the option to adjust their capital gains against the basic exemption limit of Rs 2.5 lakh. Hence, you cannot claim the TDS back.

      You may avoid double taxation on your income by claiming tax relief if India has signed the Double Taxation Avoidance Treaty (DTAA) with the country of your residence.

  • Ranga says:

    Hi Srikanth,
    Nice service to public.. informative and responsive. Kudos!

    Clarfication re Tax Ltcg AY 2021-22

    Scenario. Debt MF sold after 3 years…

    A. What tax rate applies 10% or 20% and
    B. under what section 111 or 112 or 112A?
    C. Can 80C savings (PPF/ELSS..) be used to offset/avoid LTCG tax?
    Thanks in advance for your help!

    • Sreekanth Reddy says:

      Dear Ranga,
      Thanks for the appreciation!

      A – The LTCG tax rate on non-equity funds is 20% (with Indexation benefit).
      B – LTCG u/s 112

      Section 112 :
      Taxation on LTCG covered under section 112 of the Act prohibits an individual from claiming tax breaks under section 80C to 80U on these LTCG. These capital gains are taxed at a rate of 20 per cent after allowing indexation benefit.

      Long-term capital gains on the units of debt-oriented mutual funds, listed and unlisted taxable securities such as unlisted shares or listed bonds/debentures where exemption under section 10(38) is not available (like sale of ..

      C – Taxpayers can claim deductions under sections 80C to 80U of the Income-tax Act from gross total income to reduce the total tax..

      Related articles :
      * How to adjust Short Term Capital Gains against the Basic Exemption Limit? | Tax Rules & Examples
      * How to save Income Tax by adjusting Long Term Capital Gains against Basic Exemption Limit?

      • Ranga says:

        Thanks Sreekanth! The scenarios you have outlined in the second article are good.

        My case seems to be covered, yet just want to be sure if I fall under the no tax category.

        Q: Is stipend received by a student from college for pursuing graduate studies taxable?

        Option 1. If stipend is excluded from gross income, my ltcg and other income will be <2.5 lac. So, I guess I neither need to pay tax nor file ITR.

        Option 2. But, if stipend is taxable, income will exceed 2.5lac. in which case, as per scenario 4/5 mentioned in the second article (save taxes in ltcg), I could invest in 80c, reduce stipend and other income to bring it down to <2.5 lac. Again resulting in no tax and no ITR filing.

        Appreciate your guidance and steer on what would be applicable Option 1 or Option 2. Or, if I am wrong, maybe Option 3 or 4 which or 5 would entail either paying tax or filing ITR or both.

        Thanks again Sreekanth!
        PS: if you prefer I take it offline, happy to do that.

        • Sreekanth Reddy says:

          When a person receives a stipend for educational purposes then it can be referred to as a scholarship and hence, no tax shall be levied. Research fellowships or grants received from universities are exempt from taxes as they are considered as an aid for further education.

          If you have realized capital gains then you got to file your ITR.

      • Dhiren says:

        Hi Sreekanth,

        For Point A- Is there an option to go for 10 % tax rate but without indexation benefits on LTCG on Debt MF?
        Is it something which was available earlier ?

  • Akhil says:

    Hi Shrikant,

    I am looking to invest 10l at one go where i can get monthly dividend/income. Can you please suggest few good funds or any other idea where i can get monthly or quarterly income?
    Looking forward.

  • Vijayan valiyapurayil says:

    Dear Sreekanth,It is a pleasure to go through your write up.Simple and much informative. Thank you.Update us then and there whenever CBDT comes out with any circulars clarifying the rules.

  • N SIVAKUMAR says:

    OK SIR NOTED. What about units of any mutual fund solt directly to fund house ?Whether they are also subject to Capital gains tax. How to such gains in ITR 2 ,which asks only about units sold through stock exchanges where STT is paid.?Where to show units sold to fund houses in ITR 2 return?

  • SHARAD says:


  • L.V.Gandhi says:

    I have received mail from Sundaram MF that tax will be deducted 10% even if Dividend is less than Rs.5000 pa. Is it legal? if not what to do? How to avoid TDS on MF dividends?

  • Akter says:

    Respected Sreekanth Sir,

    I have been investing in SBI Bluechip Mutual Fund Rs. 5000/- per month.
    I have not in tax slab my yearly income 3 Lac. If in redeem my fund and profit Rs. 2 Lac.
    How tax will be calculate and how amount please give answer.

    • Sreekanth Reddy says:

      Dear Akter,
      Long term Capital Gains up to Rs 1 lakh is tax free.
      LTCG is taxable above Rs 1 lakh only.

      The LTCG (Long Term Capital Gains) tax rate on equity funds is 10% on LTCG exceeding Rs 1 Lakh.

  • A K Bhattacharyya says:

    What will be tax implication on any mutual fund dividend when there capital loss in invested amount in financial year 2020-2021. For example, yearly dividend amount is Rs 100000.00 and loss in invested amount is Rs 50000.00

  • Geeta Bhagva says:

    Can Sr Citizens (with Income less than 5 Lakhs) submit Form 15H to Mutual Funds so that TDS is not deducted?

  • Mrudula Jani says:

    Pls sir inform tax liablity on swp mutual fund

  • Mani S says:

    Nice Article, Sreekanth. Very informative. Could you kindly advise if DDT would not be applied on Dividend from Liquid Funds from 1st April 2020? Also, if there is no DDT, would TDS be deducted on Dividend paid out by a Liquid Fund?

    • Sreekanth Reddy says:

      Dear Mani,
      Any dividend payouts will be subject to TDS (>Rs 5k) and is a taxable income as per individual’s tax slab rate..

  • Anuj says:

    Hi Sreekanth,
    So, 10% TDS is applicable for MF with Dividend option. Not on MF with growth option?

    • Sreekanth Reddy says:

      Dear Anuj,
      Not necessarily.
      My understanding is, it is applicable irrespective of Growth or Dividend option.
      A mutual fund scheme owns certain stocks, if those companies pay dividend then AMC will allocate such dividend to unitholders proportionately (based on unit holdings), in such a case, dividend tax comes into picture..

      • Anuj says:

        Hi Sreekanth,
        Its mentioned as 10% TDS on dividend income.
        Equity MF with Growth option does not provide any dividend to buyer. So how will it applicable for Growth option as well?
        Please correct me if its wrong.

        • Sreekanth Reddy says:

          Dear Anuj,
          MF Scheme holds companies shares, they can declare dividend, same is received by MFs, paid to unitholders, they have to pay tax on such dividends received (this is my understanding as of now).

        • Sreekanth Reddy says:

          Dear Anuj,
          Based on the clarification note issued by the CBDT, TDS @ 10% will be applicable on Dividend Payments ie Dividend option only.

  • Srinu says:

    How equity mutual fund dividend from stock dividend. In which case upto 10L dividend is taxfree at the hand of individual.

    • Sreekanth Reddy says:

      Dear Srinu,
      I believe that the dividend received (up to Rs 10 lakh) from Stocks is exempted from tax till 31st March 2020 only.
      From next FY, the same rules as mentioned in the above article will apply.
      Dividend is taxable in the hands of investor at applicable income tax slab rates.

      • Srinu says:

        Thanks Sreekanth. I am holding L&T finance Preferential shares at 7.95%. Any dividend received on this become taxable from April 2020 onwards?

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