Taxation of Dividends Offered by Mutual Funds- As per the amendments made in the Union Budget 2020, dividends offered by any mutual fund scheme are taxed in the classical manner. That is, dividends received by investors are added to their taxable income and taxed at their respective income tax slab rates.

Taxation of Capital Gains Offered by Mutual Funds- The taxation rate of capital gains of mutual funds depends on the holding period and type of mutual fund. The holding period is the duration for which the mutual fund units were held by an investor. In simple words, the holding period is the time between the date of the purchase and sale of mutual fund units. Capital gains realised on selling units of mutual funds are categorised as follows:

Fund Type	Short-term capital gains	Long-term capital gains
Equity funds	Shorter than 12 months	12 months and longer
Debt funds	Shorter than 36 months	36 months and longer

The short-term and long-term capital gains offered by mutual funds are taxed at different rates.

Taxation of Capital Gains of Equity Funds- Equity funds are those mutual funds whose portfolio’s equity exposure exceeds 65%. As mentioned above, you realise short-term capital gains on redeeming your equity fund units within a holding period of one year. These gains are taxed at a flat rate of 15%, irrespective of your income tax bracket. You make long-term capital gains on selling your equity fund units after a holding period of one year or more. These capital gains of up to Rs 1 lakh a year are tax-exempt. Any long-term capital gains exceeding this limit attracts LTCG tax at the rate of 10%, and there is no benefit of indexation provided.

Taxation of Capital Gains of Debt Funds- Debt funds are those mutual funds whose portfolio’s debt exposure is in excess of 65%. As mentioned in the table above, you get short-term capital gains on redeeming your debt fund units within a holding period of three years. These gains are added to your taxable income and taxed at your income tax slab rate. Long-term capital gains are realised when you sell units of a debt fund after a holding period of three years. These gains are taxed at a flat rate of 20% after indexation. Also, you are levied with applicable cess and surcharge on tax.

Fund type	Short-term capital gains	Long-term capital gains
Equity funds	15% + cess + surcharge	Up to Rs 1 lakh a year is tax-exempt. Any gains above Rs 1 lakh are taxed at 10% + cess + surcharge
Debt funds	Taxed at the Investor’s Income tax slab rate	20% + cess + surcharge After Indexation