Suppose you withdraw money within a year of making an equity mutual fund investment. You will be taxed 15% on your short-term capital gains, plus surcharge and cess. For debt funds, your returns are added to your income and taxed accordingly.
Short-term means less than 12 months for equity and balanced funds and less than 36 months for debt funds. Balanced funds invest a minimum of 65% of their assets in equities and are taxed as non-tax saving funds.
If you wait for more than 12 months before withdrawing, you don’t have to pay a tax for returns up to Rs 1 lakh. You will be taxed at 10% on your long-term capital gains for more than this amount and lose the benefit of indexation. Indexation allows you to inflate the buying price of your asset using a government-notified inflation factor. This protects investors from the effects of inflation.
Moreover, you can claim tax exemption if you’ve invested a minimum amount of Rs 1.5 Lakh. You can save up to Rs 30,000 if yours is a 20% tax bracket.
For debt funds, if you wait for more than 36 months, you’re taxed at 20% on your returns after indexation.
If you’ve invested in a systematic investment plan (SIP), every investment is a new venture and is taxed accordingly.