What are the Taxation rules of Equity Funds?

What are the Taxation rules of Equity Funds

One thing that comes to every investor’s mind apart from the return and related risk is the associated tax compliances. The last time we checked 2 types of taxes were applicable on sale of mutual funds i.e. capital gains (under Income Tax Act) and dividend distribution tax (DDT). 

Capital Gains

If any investor holds a mutual funds unit of the scheme for a period of up to one year, provisions of short-term capital gain (STCG) are applicable on the sales proceeds. The applicable tax rate on such securities is 15%. So, if you have a unit of mutual funds that you sell within a year, you are liable to pay 15% as tax of the capital gain on sale proceeds for that financial year. 

However, if the investor holds the units of the mutual fund scheme for a period exceeding one year, then the capital gains earned by you are called long-term capital gains (LTCG). LTCG above Rs.1 lakh is taxed at 10% without indexation benefits.

Dividend Distribution Tax (DDT)

On mutual funds, dividend distribution tax is applicable at 10%. Dividend distribution tax is applicable on dividend receipts. This amount is taxable in the hands of the corporates. The corporates deduct the dividend distribution tax before giving any dividends to its investors. The investors do not have to pay anything as it has been already deducted. Therefore, there is no need for investors to pay additional dividend distribution tax on dividends received on their investment. 


It could be concluded that on a mutual funds unit held for 1 year or less, the applicable tax rate is 15% on total gain. Whereas, in cases where mutual funds have been held for more than 1 year, a tax rate of 10% is applicable on total gains. Also, dividend distribution tax is applicable at 10% which is automatically deducted from the dividends and paid by the corporates.

What Is the Debt-Snowball Method?

Debt Snowball Method

Legendary investor, Warren Buffet has called the power of compounding- the eighth wonder of the world. Compounding is the process in which an asset’s earnings are reinvested to generate additional earnings over time. This return can be in the form of interest, dividend or capital gains. Compounding can be explained as interest on interest- the effect of which is to magnify returns to interest over time, this is also known as the “miracle of compounding”. This can very well be understood by the example of a snowball.

Have you thought what happens when you push a small snowball down a hill? When you push it down a hill, it continuously picks up more snow. By the time it reaches the bottom of the hill it is a giant snow boulder. While falling downhill it gets bigger with every revolution. The same happens with money, if you invest INR 100 for 2 years at 10% compound interest p.a., at the end of 1st year you have INR 110. Now, for the second year, the whole INR 110 is reinvested. So you get interest in this INR 110. Therefore, you get INR 121 at the end of the second year.

It is not a secret anymore that you can grow the money you save by investing it to earn a return. You can make your money grow faster if you reinvest the returns along with the principle amount. Various investments like savings accounts, fixed deposits, recurring deposits and bonds pay interest. Such investments provide you with clarity as exactly how much money you’re going to earn. Here, you still benefit from compounding by reinvesting your earnings on other investments, like stocks, mutual funds and exchange-traded funds.
Additionally, Rule 72 is a highly used method for understanding the application of the power of compounding. It is a technique to identify at what period would a particular sum of money double it at a given rate of interest. It requires you to divide the number 72 by the rate of interest. For example- if you invest a sum of money in a fixed deposit at an interest rate of 8% p.a. it would take 9 years for you to double the amount (72/8).