NISM Series V-D · Chapter 8
Taxation
This original lesson is awaiting subject-matter review. If something looks wrong, tell us through the contact page.
Tax decides how much of a return an investor actually keeps, so it shapes which scheme and which option suits a client. This lesson follows the rules in the March 2026 workbook. Tax laws change often, so always check the current Finance Act before advising a client.
1Two levels of tax: the scheme and the investor
A mutual fund scheme itself pays no income tax on what it earns (Section 10(23D)). Tax falls only on the investor, in two ways: on IDCW received, and on capital gains when units are sold or redeemed. For jointly held units, the income is taxed in the hands of the first holder.
Example A scheme earns ₹5 crore in interest and dividends this year. It pays no tax. Investors pay tax only when they receive IDCW or redeem at a profit.
Remember
- Scheme exempt; investor taxed on IDCW and capital gains.
- Joint holding: taxed in the first holder's hands.
2Which schemes count as equity-oriented
For tax, an equity-oriented fund invests more than 65% in equity shares of listed domestic companies. All other schemes are non-equity-oriented. A fund of funds that invests in equity mutual fund schemes is still treated as non-equity-oriented, because it holds fund units rather than shares directly.
Example A balanced advantage fund keeps 68% in listed Indian shares (including hedged positions), so it is equity-oriented for tax. A hybrid fund with 50% equity is not.
Remember
- Equity-oriented: more than 65% in listed domestic equity.
- FoFs (as per the workbook): non-equity, even if the underlying funds are equity.
3Capital gains
A gain is short-term or long-term depending on how long the units were held. For redemptions on or after 23 July 2024:
| Scheme type | Long-term after | Short-term gains | Long-term gains |
|---|---|---|---|
| Equity-oriented (more than 65% equity) | 12 months | 20% | 12.5% on gains above ₹1.25 lakh a year |
| Debt-oriented (more than 65% debt) | — | Slab rate | Slab rate (no long-term benefit) |
| Others (e.g. hybrid with 35–65% equity, FoFs, international) | 24 months | Slab rate | 12.5% |
For equity units bought before 31 January 2018, grandfathering applies: the cost is taken as the higher of the actual cost and the NAV on 31 January 2018 (but not more than the sale value).
Example Meera redeems equity fund units held for 3 years, with a gain of ₹2,40,000. The first ₹1,25,000 of long-term gains is exempt, so the taxable gain is ₹1,15,000. Tax = 12.5% × ₹1,15,000 = ₹14,375 (plus cess).
Exam trap Gains from debt-oriented funds are taxed at the slab rate whatever the holding period. The ₹1.25 lakh exemption applies only to long-term gains on equity-oriented schemes.
Remember
- Equity: 12 months; STCG 20%; LTCG 12.5% above ₹1.25 lakh.
- Debt-oriented: slab rate always.
4Tax on IDCW
IDCW is added to the investor's income and taxed at the slab rate. For resident investors, the fund deducts TDS of 10% when IDCW paid to an investor in a year exceeds ₹10,000. For high-income investors, the growth option is usually more tax-efficient: tax is deferred until redemption, and gains may qualify for lower capital gains rates, while IDCW is taxed at the slab rate each time it is paid.
Example Arjun is in the 30% tax bracket. ₹50,000 of IDCW costs him ₹15,000 in tax (plus cess) this year. In the growth option he would pay nothing until redemption, and then possibly at 12.5% on long-term equity gains.
Remember
- IDCW: slab rate; TDS 10% above ₹10,000 a year (residents).
- Growth option: tax deferred, often more efficient for high earners.
5Stamp duty
Stamp duty of 0.005% is charged when units are issued: on purchases, SIP instalments, switch-ins and IDCW reinvestment. Units are allotted on the amount left after stamp duty. Transfers of units attract 0.015%.
Example On a ₹1,00,000 purchase, stamp duty is ₹5, so units are allotted for ₹99,995.
Remember
- 0.005% on issue of units.
6Setting off losses
- A short-term capital loss can be set off against short-term or long-term gains.
- A long-term capital loss can be set off only against long-term gains.
- Capital losses cannot be set off against salary or other income.
- Unused losses can be carried forward for 8 years.
Example Raj has a ₹40,000 short-term loss on a debt fund and a ₹60,000 long-term gain on an equity fund. He can set off the short-term loss against the long-term gain, leaving ₹20,000 of gains.
Remember
- STCL → STCG or LTCG; LTCL → LTCG only; carry forward 8 years.
7Securities Transaction Tax
STT is charged only when units of equity-oriented schemes are sold or redeemed. There is no STT on purchases, and none on debt schemes.
Exam trap STT does not apply when you buy units, on IDCW, or on debt fund redemptions.
Example An investor redeems ₹2 lakh from an equity fund and ₹2 lakh from a liquid fund on the same day. STT is charged only on the equity fund redemption.
Remember
- STT: only on sale/redemption of equity-oriented units.
8Section 80C and ELSS
Under the old tax regime, an investment in ELSS qualifies for a deduction under Section 80C, within the overall limit of ₹1.5 lakh shared with PF, insurance premiums and other 80C items. ELSS units are locked in for 3 years from each investment (each SIP instalment has its own 3-year lock-in). Under the new tax regime, there is no 80C deduction, so ELSS is simply an equity fund with a lock-in.
Example Sanjay has already used ₹1.5 lakh of 80C through PF and insurance. A further ₹50,000 in ELSS gives no extra deduction, but those units are still locked in for 3 years.
Remember
- ELSS: 80C (old regime), ₹1.5 lakh overall limit, 3-year lock-in per instalment.
9Tax deducted at source
- Residents: TDS of 10% on IDCW above ₹10,000 a year; no TDS on redemptions.
- Non-residents: TDS applies to IDCW and capital gains. If the investor's country has a tax treaty (DTAA) with India and the investor provides the required documents, TDS is at the lower of the Income Tax Act rate and the treaty rate.
Example An NRI from a country whose tax treaty with India sets a 10% rate, while the Income Tax Act rate is higher, submits his Tax Residency Certificate and other documents. TDS is deducted at the lower treaty rate.
Remember
- NRIs: lower of Act rate and DTAA rate, with documents.
10GST
GST is charged on the AMC's management fee, over and above the TER limits. When an exit load is collected, the GST on it is deducted first and the net amount is credited to the scheme.
Example An investor pays a ₹1,000 exit load. GST on that load is deducted, and the remaining amount is credited back to the scheme.
Remember
- GST on exit load: deducted, net credited to the scheme.
Original summary written by Integrato Digital to complement the official NISM workbook (July 2026 version). Read the workbook for the full text.