Mutual fund investments have become a go-to choice for many Indians looking to build wealth over time through systematic investment plans (SIPs), lump-sum entries, or goal-based strategies. According to the Association of Mutual Funds in India (AMFI), the industry’s assets under management (AUM) have grown from ₹27 lakh crore in February 2020 to over ₹64 lakh crore as of February 2025, reflecting a more than two-fold increase in five years.
With digital access, simplified KYC norms, and a growing appetite for returns, mutual funds have firmly secured their place in personal finance across income groups. That said, one part of the process often gets overlooked until it’s time to file returns - mutual fund taxation.
Whether you"re earning dividends or booking profits, the tax on mutual funds in India directly impacts your real returns. So, understanding how your investments are taxed is a core part of making informed decisions that actually pay off - and that’s what this post is all about.
Mutual fund taxation depends on a few key factors. Here"s what you should keep an eye on:
Let"s understand the tax implications for various types of mutual funds:
Equity funds are the most popular and preferred type of mutual fund investments in India. They invest most of your money (at least 65 percent) in shares of Indian companies - think of it as pooling your money with others to focus on large-cap or small-cap companies.
For example, say you invested ₹2 lakh in an equity mutual fund in April 2024.
If you"re looking for lower-risk investment options, debt mutual funds might suit you. These funds invest in fixed-income assets like bonds and corporate securities, offering more stable but moderate returns. Timing your investment can make a big difference in your post-tax returns.
Hybrid mutual funds are a mix of debt and equity, giving you a balanced approach to returns and risk. Their taxation depends on how much of the fund is invested in equity. If 65 percent or more is in equity, it’s taxed like an equity-oriented fund. If it’s less than 65 percent, it’s taxed like a debt-oriented fund. Capital gains are taxed when you redeem the investment, and dividends are also taxable with 10 percent TDS if they exceed ₹5,000 in a year.
The Union Budget 2025-26 announced updates for mutual fund taxation:
If you"re wondering how to deal with dividend income while filing your tax return, here"s what you need to know:
Earlier, dividend income was tax-free because companies paid Dividend Distribution Tax (DDT), but that"s no longer the case. Now, any dividend income you receive is added to your total income and taxed at your applicable income tax slab rate.
Section 194 mandates 10 percent TDS on dividends if they exceed the threshold:
If you’re an NRI investor, you’ll face 20 percent TDS. Still, you can benefit from lower treaty rates under DTAA (double taxation avoidance agreement), along with documents like form 10F, tax residency certificate, and declaration of beneficial ownership.
To file your taxes on mutual funds in India, visit the official Income Tax e-filing portal to file your ITR quickly and accurately. If the TDS is deducted, don’t forget to declare the full dividend income in your ITR and adjust TDS using your AIS and Form 26AS.
First Published: May 13, 2025, 15:45
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