Yes, the returns on overnight funds are taxable. However, they are more tax efficient as compared to other investment options. The tax rates depend on the period for which you hold the funds. If you hold the funds for less than three years, you must pay a Short-Term Capital Gains Tax on the returns. The Short-Term Capital Gains Tax rate will be decided based on the income slab of the investor.
However, if you hold the fund for more than three years, you will have to pay a Long-Term Capital Gains Tax at a flat rate of 20%.