How Stocks and Mutual Funds Are Taxed in India

Investing in stocks and mutual funds is a common way to grow wealth, but it also carries tax obligations. The tax treatment largely depends on the nature of the asset - equity or debt - and the holding period. Below, we outline the tax implications of investing in shares and mutual funds for a resident individual investor:

Taxation Of Listed Equity Shares, Equity Exchange Traded Funds (ETFs) and Equity-Oriented Mutual Funds

Equity-oriented funds are those funds which fulfil the following conditions:

1)  invest a minimum of 65 per cent of their total assets in domestic equities or

2)  invest at least 90 per cent of their total assets in units of another fund, which in turn invests at least 90 per cent of its total assets in equity shares of domestic companies.

“In case of listed equity shares, Securities Transaction Tax (STT) should be paid at the time of acquisition and transfer, and in case of equity-oriented mutual funds, STT should be paid at the time of transfer,” informs Manoj Purohit, Partner, Financial Services Tax, BDO India.

• Short-Term Capital Gains (STCG): Gains from selling shares /units held for 12 months or less are considered STCG. These gains are taxed at a flat rate of 20 per cent irrespective of the individual's income tax slab.

• Long-Term Capital Gains (LTCG): Gains from selling shares/units held for more than 12 months are classified as LTCG.

  - LTCG up to Rs 1.25 lakh in a financial year is exempt from tax.

  - Gains exceeding this limit are taxed at a flat rate of 12.5 per cent without benefit of indexation.

Taxation Of Debt Mutual Funds And Debt ETFs

Debt-oriented mutual funds are funds that primarily invest in debt and money-market instruments and have equity exposure of 65 per cent or less.

Debt Mutual Funds Purchased Before 31 March 2023:

• STCG: Gains from selling units held for 24 months or less are considered STCG. These gains are taxed at the individual's income tax slab.

• LTCG: Gains from selling units held for more than 24 months are classified as LTCG. These gains are taxed at 12.5 per cent without the benefit of indexation.

Debt Mutual Funds (Including Specified Fund) Purchased After 31 March 2023

Gains are always taxed as per applicable income tax slab as deemed STCG. No classification of LTCG or STCG.

Unlisted Shares

Tax treatment of unlisted equity shares and preference shares are as under:

• STCG: Gains from selling shares held for 24 months or less are considered STCG. These gains are taxed at an individual's income tax slab.

• LTCG: Gains from selling shares held for more than 24 months are classified as LTCG. These gains are taxed at 12.5 per cent without the benefit of indexation.

Listed Preference Shares

“The tax treatment of listed preference shares is the same as that of unlisted shares, with the only difference being the period of holding. For listed preference shares, the holding period is 12 months, as against 24 months for unlisted shares,” says Purohit.

Taxation Of Dividend Income

Dividend income is taxed at applicable slab rates.

Note: Above tax rates are exclusive of applicable surcharge and health and education cess of 4 per cent.

“Understanding capital gains taxation on stocks and mutual funds is essential for making informed investment decisions. With frequent changes in tax laws, investors must plan strategically to minimise tax liabilities and maximise post-tax returns,” says Purohit.