Investing in mutual funds has been a popular choice by many investors in India. It not only offers a convenient way to grow your wealth, but also several tax benefits. However, to maximise the returns on funds, it is essential to understand the tax implications, and there have been some significant changes in the taxation rules of the 2025 Union Budget. Understanding these changes helps you manage your finances and plan properly.
This article explores some of the factors affecting funds taxation and discusses the key points of 2025 tax policies.
Table of Contents
What is the Tax on Mutual Funds?
The tax implemented on funds, mainly revolves around capital gains (the profits earned from the investments), whether you are investing in index mutual funds or any other category. That is why it is always advised to understand how your investment returns will be taxed and the deductions. These capital gains can be categorised into two categories:
- Short-Term Capital Gains (STCG): The profits earned from selling assets or units within a short period of time (generally within a year). It mostly impacts the tax bills of high earners.
- Long-Term Capital Gains (LTCG): As the name suggests, it refers to the gains earned from selling the financial assets (held for at least one year). LTCGs usually have low tax rates, which significantly encourages investors to keep their securities for longer periods.
Factors Determining the Tax on Mutual Funds
There are several factors that influence the tax implications on funds, including:
- Type of Funds: Tax rates differ depending on the type of mutual fund you’ve invested in, like equity, debt, hybrid, and more.
- Holding Period: The time period between the purchase and sale of securities. If you hold your assets for a longer period of time (more than a year), you will be taxed at a lower rate than keeping them for a shorter period.
- Capital Gains: As mentioned above, it refers to the profits earned by investors when they sell securities at a higher price than the price at which they have purchased them.
- Dividend: When fund houses distribute a portion of their profits to investors, that is called a dividend.
Update on Mutual Fund Taxation in India for 2025
Let’s explore some of the basic updates on MF online taxation in 2025:
- Equity Fund Investors
- Long-Term Capital Gains: Profits from securities held for more than 12 months will be taxed at 12.5%, subject to changes for specified funds.
- Short-Term Capital Gains: If you redeem your equity funds before 12 months, then it will be taxed at 20%.
- Debt Fund Investors
- There will be no indexation benefits.
- The gains will be taxed at slab rates, which will lead to higher tax rates.
Common Strategies to Reduce Tax Burden
Here are some of the basic strategies that you can use to minimise the tax burden off your shoulders:
- Holding securities for more than 12 months will qualify you for long-term capital gains, and you must pay lower taxes. For non-equity schemes, you have to hold securities for at least 24 months to qualify for LTCG.
- If you sell an unprofitable mutual fund and buy another profitable one, it can help you balance capital gains and reduce taxes.
- Avoid taking out the dividends and consider reinvesting the sum to purchase any other securities.
Final Thoughts
The Union Budget of 2025 have undoubtedly impacted all investors. To minimise the taxes you must hold securities for a longer period of time and reinvest the dividends earned.
Meanwhile, don’t forget to invest in MF online from a trusted platform like Bajaj Finserv. Do your research, compare the schemes offered online, and choose the one that best suits your needs and aligns with your financial goals.
So, plan your investments wisely and hold them for longer periods to pay less tax and make the most of your returns.