If you invest in mutual funds, here's how your income is taxed

When you receive interest income and capital gains from your mutual fund investments, it will be taxed at different rates depending on where it comes from. Here's all you should know about mutual funds taxes. 

When you invest in a mutual fund, you are bound to receive incomes from:

• Regular dividends
• Capital gain on sale of shares

Here's how it is taxed:

1. Dividends: Dividends received by investors are added to their taxable income and investors will be taxed at their respective income tax slab rates. 

2. Capital gains: The tax 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. 

Type of funds: 

1. Debt and equity funds : Debt funds are those mutual funds whose portfolio’s debt exposure is in excess of 65% whereas in equity mutual funds, a portfolio’s equity exposure exceeds 65%. Hybrid funds are those funds which invest both in debt and equity. The below table shows when 

• When you earn short-term capital gains on redeeming your debt fund units within a holding period of 36 months, these gains will be added to your taxable income and taxed at your income tax slab rate. When you earn long-term capital gains on selling units of a debt fund after a holding period of 36 months, these gains will be taxed at a flat rate of 20% after indexation. 

• When you earn short-term capital gains on redeeming your equity fund units within a holding period of 12 months, you pay tax of flat 15%. When you make a long-term capital gain on selling your equity fund units after a holding period of 12 months, here is how tax is computed:. Capital gains of up to Rs 1 lakh a year is tax-exempt. Any long-term capital gains above this 1 lakh limit will attract LTCG tax at the rate of 10%.