Equity Funds are short-term investments if the holding period is less than 12 months. In the same line, debts funds are viewed as short-term if the holding period is less than 36 months. Accordingly, gain on sale is long term or LTCG and short term STCG as per the holding period.
a. TAX SAVING EQUITY FUNDS (ELSS)
These funds invest in equity & equity-related securities. Tax-Saving ELSS schemes are Closed-ended funds with a lock-in period of 3 years. At the time of redemption, if your investment amount is more than 1L then LTCG will be applicable at 10% without indexation. No tax is applicable if gain is less than or equal to 1L.
b. NON TAX SAVING EQUITY FUNDS
Long-term capital gains (LTCG) on non-tax saving equity funds up to Rs 1 lakh is free of taxation. LTCG above Rs 1 lakh is taxable at the rate of 10% without the benefit of indexation. There is a 15% tax on short-term gains from equity funds upon redemption of units before the completion of 12 months. Gains made before January 31, 2018 are grandfathered – you need not pay any tax on those gains.
c. DEBT FUNDS
LTCG on debt fund are taxable at the rate of 20% after indexation. Indexation is a method which involves factoring the rise in inflation from the time of purchase to sale of the units. Short term capital gains from debt funds are to be added to your overall income. They are subject to short-term capital gains tax (STCG) as per the income tax slab you fall under.
d. BALANCED FUNDS
Balanced funds are equity-oriented hybrid funds that invest at least 65% of their assets towards equities. The tax treatment on balanced funds is precisely the same as non-tax saving equity funds.
e. SIPs
Each SIP or a systematic investment plan is treated as a new investment, and it attracts taxes on its gains separately. If after 12 months, you decide to redeem your entire accumulated corpus (investments plus gains), all your gains will not be tax-free. Only the gains earned on the first SIP would be tax-free because only that investment would have completed one year. The rest of the gains would be subject to short-term capital gains tax.
Conclusion :
The longer you hold onto your mutual fund units, the more tax-efficient they become. The tax on long-term gains is comparatively lower than that of the tax on short-term gains.