How do Capital Gains on mutual funds work?

Capital gains on mutual funds occur when the fund sells securities within its portfolio at a profit. The tax treatment of capital gains on mutual funds depends on whether the gains are classified as shortterm or longterm. Here's how it works in the context of India:

1. ShortTerm Capital Gains (STCG): If you hold mutual fund units for a period of up to 36 months, any gains from the sale of those units are considered shortterm capital gains (STCG). STCG is added to your taxable income and taxed at your applicable income tax slab rates.

2. LongTerm Capital Gains (LTCG): If you hold mutual fund units for a period of more than 36 months, any gains from the sale of those units are considered longterm capital gains (LTCG). LTCG on equityoriented funds (where more than 65% of the portfolio is invested in equities) up to Rs. 1 lakh in a financial year are currently exempt from tax. LTCG on equityoriented funds exceeding Rs. 1 lakh are taxed at a flat rate of 10%. For debtoriented funds, LTCG exceeding Rs. 1 lakh is taxed at a flat rate of 20% with the benefit of indexation.

3. Dividends: Apart from capital gains, mutual funds may also distribute dividends to their unit holders. Dividends received from mutual funds are subject to dividend distribution tax (DDT) before being distributed to unit holders. However, effective from April 1, 2020, dividends received from mutual funds are now taxable in the hands of the investors at their applicable income tax slab rates.

It's important to note that the tax treatment of mutual funds can be complex and may vary based on the specific type of fund and the holding period. It's advisable to consult a tax professional or refer to the latest tax regulations and guidelines issued by the tax authorities in your country for accurate and uptodate information regarding the tax implications of mutual fund investments.