Your tax depends on three main factors:
Profit Type: Is it a periodic payout (Dividend) or profit from selling units (Capital Gain)? 💰
Fund Category: Does the fund invest in stocks (Equity) or interest-bearing instruments (Debt/Money Market)? 📈
Taxpayer Status: Are you an Active Filer, a Late Filer (filed after the deadline), or a Non-Filer? 📋
Tax is usually deducted at source by your Asset Management Company (AMC), meaning you receive the net amount after tax. ✂️
1. Taxation on Dividends (Income Distribution) 💵
Under Section 150, tax is withheld when the fund distributes its income. The Finance Act 2025 uses a proportional model based on the fund's actual earnings.
Income Source | Active Filer | Late Filer* | Non-Filer |
Stock (Equity) Component | 15% 🟢 | 25% 🟡 | 30% 🔴 |
Debt (Interest) Component | 25% 🟡 | 35% 🟠 | 50% ❌ |
Companies (Corporate) | 15% (Stock) / 29% (Debt) | 29% | 29% |
Pro-Tip: If a fund earns more than 50% of its income from debt (interest), it is treated as a "Money Market" fund, and the higher 25% rate applies to the whole dividend for filers. ⚠️
2. Capital Gains Tax (CGT) 💹
CGT applies when you redeem (sell) your units for a profit (Section 37A).
A. Units Bought ON or AFTER July 1, 2024 🗓️
For all new investments, the tax is simplified:
Active Filers: Flat 15% (regardless of how long you hold them).
Non-Filers: Taxed at Normal Income Tax Slabs (15% to 45%).
Companies: 15% (Stock funds) or 25% (Other funds).
B. Units Bought BEFORE July 1, 2024 ⏳
Older units still benefit from the "Holding Period" rule:
Holding Period | Active Filer | Non-Filer |
Less than 1 Year | 15% | 30% |
1 – 2 Years | 12.5% | 25% |
5 – 6 Years | 2.5% | 5% |
Over 6 Years | 0% (Exempt) ✨ | 0% (Exempt) ✨ |
3. Zakat Deduction 🤲
Rate: 2.5% of the redemption amount/face value.
Threshold: Only deducted if your investment exceeds the Nisab (announced by the Govt on 1st Ramadan). 🌙
Exemption: You can avoid this by submitting a Zakat Affidavit (Form CZ-50) to your AMC.
4. Ultimate Tax Saving: VPS 🛡️
Regular mutual funds no longer offer direct tax credits for individuals. However, Section 63 allows you to save big via Voluntary Pension Schemes (VPS):
Tax Credit: Claim a rebate on up to 20% of your taxable income. 📉
Impact: This can effectively reduce your annual tax bill by thousands of rupees.