03 August 2024
**Mutual Fund Redemption Taxation:**
**1. Taxability Under Capital Gains:**
The taxation of mutual fund redemption depends on the holding period of the units:
- **Short-Term Capital Gains (STCG):** If the mutual fund units are redeemed within 36 months (3 years) from the date of purchase, the gains are classified as Short-Term Capital Gains. These gains are taxable at a rate of 15% plus applicable surcharge and cess.
- **Long-Term Capital Gains (LTCG):** If the mutual fund units are held for more than 36 months (3 years) before redemption, the gains are classified as Long-Term Capital Gains. For mutual funds that are equity-oriented, the LTCG is exempt up to ₹1 lakh per financial year. Above this limit, the LTCG is taxed at 10% without the benefit of indexation.
**2. Securities Transaction Tax (STT):**
- **Equity Mutual Funds:** When redeeming equity mutual funds, STT is applicable on the redemption of units. STT is levied at the rate of 0.001% on the redemption value.
- **Debt Mutual Funds:** STT is not applicable on debt mutual funds. The taxation is purely based on the capital gains.
**3. Relevant Sections of Income Tax Act:**
- **For STCG (Equity Mutual Funds):** Section 111A of the Income Tax Act applies. The tax rate is 15% plus applicable surcharge and cess.
- **For LTCG (Equity Mutual Funds):** Section 10(38) provides exemption for gains up to ₹1 lakh. Above this limit, Section 112A applies, and the tax rate is 10% without indexation.
- **For STCG (Debt Mutual Funds):** Section 48 and Section 112 apply. The gains are taxed according to the individual's income tax slab rates.
- **For LTCG (Debt Mutual Funds):** Section 48 and Section 112 apply. The gains are taxed at 20% with indexation benefits.
**Summary:**
- **Holding Period Less Than 3 Years:** Gains are treated as Short-Term Capital Gains (STCG) and taxed at 15% (for equity) or according to income tax slab rates (for debt). - **Holding Period More Than 3 Years:** Gains are treated as Long-Term Capital Gains (LTCG). Equity funds have an exemption up to ₹1 lakh, and gains above this are taxed at 10%. Debt funds are taxed at 20% with indexation benefits. - **STT:** Applicable on equity mutual fund redemptions, not on debt mutual funds.
Always ensure to check the current tax laws as they may change over time and consult with a tax professional for personalized advice.
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