Taxation basics
In this chapter: Equity vs debt taxation · STCG, LTCG, dividend taxation
Equity-oriented funds (>65% in domestic equity) get favourable tax: STCG 20% (post-Budget 2024) for holdings <12 months; LTCG 12.5% above ₹1.25L per year for holdings ≥12 months. Debt and most non-equity hybrids are taxed at slab rates regardless of holding period since April 2023. Dividends are added to investor income at slab rates.
Switches and consolidations are taxable events — even between regular and direct plans of the same fund. STT (0.001% on redemption) is the price of equity's favourable tax treatment. International funds with >65% in foreign equity (like S&P 500 funds): post-Budget 2024 rules, depend on whether classified as equity-oriented for Indian tax. Gold ETFs/funds: gains taxed at slab rates after April 2023. SWPs from equity funds use the FIFO rule (first-in-first-out) for cost basis.
A nuanced angle: tax-loss harvesting is technically allowed but must have a genuine non-tax motive. Selling units at a loss to crystallise STCL/LTCL and immediately re-investing in a similar (but not identical) scheme is generally allowed. Selling and re-buying the SAME scheme to generate tax loss might be challenged as an artificial transaction. Direct-plan-to-regular-plan-to-direct switches purely for harvesting tax are particularly under scrutiny.