The tax treatment in the mutual fund is categorised on the basis of:
i) Equity and Debt funds
ii) Long term and Short term Capital Gain
iii) Dividend and Capital Income
Equity, debt & the tax impact
Equity oriented funds are those funds where more than 65 per cent of the corpus is invested in stocks of Indian companies. Debt funds are those which invest more than 65 per cent in the debt market. Now let's say you hold the units of an equity scheme for more than a year, in that case you are eligible for long-term capital gains, which is zero. In other words, you pay no tax. But if you sell the units within a year, you have to pay short-term capital gains.
In the case of debt funds, if you sell the units after a year, you will have to pay a long-term capital gains tax, either with or without indexation, whichever is lower. Indexation is used to calculate tax when inflation is taken into account. This is good because it reduces the amount of capital gain and subsequently, the amount you end up paying as tax. If you sell the units within a year, the short-term capital gain will be clubbed with the income of the individual investor, to be taxed as per the prevailing slab system
