Dividends offered by all mutual funds are now taxed classically. They are added to your overall income and taxed as per your income tax slab. Capital gains offered by mutual funds are taxed based on the holding period and their type. The holding period is the duration over which you have stayed invested in a mutual fund.
Equity Funds If you exit an equity fund within a holding period of one year, then you make short-term capital gains. These gains are taxed at a flat rate of 15%. You make long-term capital gains on exiting an equity fund after a holding period of one year. Long-term capital gains of up to Rs 1 lakh a year are made tax-exempt. Any long-term gains exceeding Rs 1 lakh a year are taxed at a flat rate of 10%, and there is no benefit of indexation provided.
Debt Funds You make short-term capital gains on exiting a debt fund holding within three years. These gains are added to your overall income and taxed as per your income tax slab. Long-term capital gains are realised on redeeming your debt fund holdings after three years. These gains are taxed at the rate of 20% after indexation.
Hybrid or Balanced Funds If the equity exposure of a hybrid is more than 65%, then the fund is taxed like an equity fund. If not, then the rules of taxation of debt funds apply. Therefore, you need to be aware of the equity exposure before you decide to invest in a hybrid fund to plan your taxes correctly.