Mutual funds are one of the best investment instruments from the perspective of maximum returns and minimum risk. A mindful selection of funds can bring good returns with less exposure to potential risks. Along with the returns and risks of investing, a mutual fund investor should also be aware of the tax implication on the capital gains and dividends from mutual fund investment to maximise the profit earned by investing. The tax implication on the mutual fund can be implemented on various factors. Here are the different measures of implementing the tax on mutual fund gains.

Tax Implication Depending on the Holding Period

The holding period is the time period you stay invested in the mutual fund scheme. The amount of tax one has to pay depends on the time holding period. The holding period of any mutual fund can be of long term or short term.  The holding period of a debt fund is 36 months which is considered as a long term and the holding of an equity fund and debt fund are of 12 months which is called short term funds. An investor always has to pay a higher tax if the investment is redeemed before completion of the holding period.

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Tax Implications on Different Kind of Mutual Funds

Tax-Saving ELSS

The Equity Linked savings schemes are the most recommended mutual fund schemes if you aim to save on tax payment. The income tax section 80C allows an individual to claim a tax deduction of up to 1.5 lakh in a financial year and can save tax up to Rs.45,000. The ELSS comes with three years of lock-in period before which one cannot redeem the investment.

Non-Tax Saving ELSS

As mentioned above, the lock-in period of an equity-linked mutual fund is of 3 years. If you need to withdraw your investment before 3 years, your earnings will be taxable. If your earning is less than Rs. 1 lakh it would not attract any taxation. If your earnings are more than 1 lakh, you will have to pay a tax at the rate of 10% in case you have invested in Long-term capital gains. On the other hand, if you are redeeming your short term investments before 12 months, you will have to pay a tax at the rate of 15%.

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Debt Fund

The returns on long term capital gains on a debt fund are taxed at the rate of 20%. The 20% of tax is calculated after indexation. The indexation is a way to find the inflation between the year of investing and the year when they are sold. An investor gets a benefit of indexation in tax savings as the purchase price inflates and makes you save tax in capital gains.

Balanced Funds

Balances funds are the hybrid funds which invest in both equity and debt funds. But the investment in equity funds of a balanced fund should be at least 65% of total investment. As the investment in the equity fund is higher, the tax treatment is done exactly like equity funds which are non-tax savings.

SIP! Your Best Investment Plan


A SIP or a systematic investment plan is the most popular form of mutual fund investment. In a SIP investment, a fixed amount of money is invested periodically. The investment can be done monthly, quarterly, half-yearly or in yearly instalments. A SIP is a short term fund which comes with 12 months holding period. The taxation of a SIP depends on the holding period. Every instalment of the SIP is counted as an individual investment while calculating the tax. For example, if you start investing Rs.500 every month in a SIP for 12 months and want to redeem all you have invested after completion of 12 months, you will have to pay tax on 11 instalments. The reason behind getting the tax deduction on 1 instalment is that your first instalment has completed 12 months while rest of 11 instalments are not.  The first SIP of your investment only will be a tax-free investment.


Investments, as well as the tax deductions on our capital gain both, should be in consideration while planning our personal finance. The tax payment can eat up a quite big chunk of our profit gaining by investing. The right picking of a mutual fund can make one earn high returns while saving the tax. Hence the one can earn a benefit of both earning and saving. ELSS is the mutual fund that comes with both the advantages. Before you opt for any of the funds, along with capital gain, income tax saving should also be in consideration.