Are taxes eating your mutual fund returns? You’re not alone. Nowadays, more investors are gathering mutual funds for wealth creation. So, it is important for you to know the tricks to minimize taxes. While mutual funds do offer profitable returns, one must plan investments carefully to avoid unnecessary tax incidents. The Indian government reintroduced mutual fund taxation on long-term capital gains (LTCG) in the year 2018. Before this, you weren’t paying any taxes if you had held on to your equity investments for over a year. Unfortunately, that’s history now.
In case you invest in equity, debt, or hybrid funds, taxes are now a part of your investment journey. The good news is that strategic planning could help you reduce your tax liability. Let’s find out how.
Understanding Mutual Fund Taxation
Taxes on mutual funds vary depending on a few key factors:
- Fund Type
Equity, Debt, or Hybrid funds each have different rules.
- Capital Gains
Profits from selling mutual fund units are taxed.
- Dividends
Tax is deducted before you receive them.
- Holding Period
Longer holding periods generally get you lower tax rates.
Let’s break this down further:
| Fund Type | Holding Period | Tax Rate |
| Equity & Hybrid Equity Funds | < 12 months | 15% (Short-term) |
| > 12 months | 10% (Long-term, gains above Rs 1 lakh taxable) | |
| Debt & Hybrid Debt Funds | < 36 months | As per your tax slab (Short-term) |
| > 36 months | 20% with indexation benefit (Long-term) |
Knowledge of the taxation of mutual funds will help you make informed decisions in financial matters.
Are You Losing Money to Taxes?
Not many investors consider income taxes while focusing on returns. Just think, you make 2 lakh rupees in profits, but the big part of it goes away in taxes instead of income. That’s your hard-earned money slipping away. What if you could legally reduce your tax burden?
Also Read: How Cryptocurrency taxation works in India | Debt vs Equity Mutual Funds: Where Should You Invest?
Strategies to Reduce Taxes on Mutual Fund Investments
Here are the smart ways that can help you cut taxes efficiently.
1. Tax Harvesting
Tax harvesting is probably one of the greatest methods used to reduce taxes on your mutual fund gains. This means that you sell some of your mutual fund holdings in order to book long-term gains of up to 1 lakh rupees, which is tax-free.
For example,
You invested in an equity mutual fund worth 3 lakh rupees in January 2024. By February 2025, it will grow into 3.6 lakh rupees; sell it and book ₹60,000 profit. This falls under the 1 lakh rupee LTCG exemption limit. Then, reinvest it once again. You have just realized tax-free earnings. This trick keeps people from having to pay taxes every year.
2. Offset Gains with Losses
In this method, you actually make a profit from your losses. Assume that one of your mutual fund investments is performing poorly and has led to a loss of 40,000 rupees. That loss can be adjusted against any long-term capital gains that you may have made from other funds. This technique of loss harvesting is a great way of reducing one’s taxable income.
3. Use Tax Saving Mutual Funds (ELSS)
Equity Linked Saving Schemes are a type of mutual fund with tax benefits. You can claim a benefit of up to 1.5 lakh rupees in a financial year. It is under Section 80C of the Income Tax Act. The tax saving mutual funds have a lock-in of 3 years. It makes them an excellent option for investment, both as a return and a deduction.
4. Hold Investments for Longer Periods
Are you aware that the period of holding will have an impact on the tax as applicable to you? If you hold your equity mutual funds for over 12 months or debt mutual funds for more than 36 months, you will pay a lower tax. Long-term investing helps to compound your gains and avoids heavy tax deductions on mutual fund investments.
5. Split Redemptions
If you expect gains of over 1 lakh rupees, do not redeem them all in one financial year. Spread them over financial years in such a way that your LTCG stays below the exempt limit in each financial year. This way, you will be able to reduce your mutual fund’s taxation.
For example,
An investor earns 1.8 lakh rupees in capital gains from equity funds in a year. If you withdraw the full amount in one go, you will be taxed 10% on 80,000 rupees. Instead, you can redeem 90,000 rupees before March and 90,000 rupees thereafter in the next financial year. Now, both withdrawals fall under the 1 lakh rupees exemption limit, so no tax is paid!
Are You Paying More Tax Than You Should?
If you are investing in mutual funds without using these strategies, you might end up losing thousands of rupees every year. Ask yourself:
- Did I plan my withdrawals to reduce LTCG?
- Am I using ELSS funds to claim a 1.5 lakh rupees deduction?
- Have I booked losses to offset gains?
If you haven’t taken these actions yet, start getting active and take charge now.
Final Words
You cannot escape tax on mutual funds, but you can reduce it. Using a smart combination of tax harvesting, using tax-saving mutual funds, learning about holding periods, and other such strategies will ensure that you keep more of your profits.
Tax efficiency is for wealthy persons and for everyone who wants to grow his wealth wisely. Next time you invest or redeem your mutual fund units, think smart. Use mutual fund tax deduction tools to your advantage. Still unsure where to start? Then, contact a financial planner who will design a personalized tax-saving scheme just for you. Keep your goal simple. Invest wisely, reduce your taxes, and grow your wealth the smart way.
FAQs
1. How are mutual fund investments taxed in India?
Mutual fund investments in India are based on how long someone has invested in them and what kind of fund they are investing in. Equity funds held longer than a year will incur a long capital gains tax of 10% on gains made in excess of 1 lakh rupees. In the case of debt funds held for shorter than 3 years, gains are taxed according to your income slab.
2. What are tax-saving mutual funds?
Tax-saving mutual funds are also known as ELSS. It is tax-deducted under Section 80C of the ITA. You can say that they fall under an exemption of a maximum of 1.5 Lakhs rupees per annum and have a lock-in term of 3 years.
3. What is tax harvesting in mutual funds?
Tax harvesting is an activity of selling out some units of mutual funds and realizing gains within the maximum amount excused from taxation. For example, 1 lakh rupees for equity funds and then reinvesting that amount. In this practice, your long-term capital gains tax liability gets reduced.
Hello there, my name is Phulutu, and I am the Head Content Developer at Nivesh Karlo. I have 13 years of experience working in fintech companies. I have worked as a freelance writer at Policybazaar, Paytm Money, Investopedia, and others. I love writing about personal finance, investments, mutual funds, and stocks. All the articles I write are based on thorough research and analysis. However, it is highly recommended to note that neither Nivesh Karlo nor I recommend any investment without proper research and read all the documents carefully.
