What Are the Tax Implications of Mutual
Funds, PMS, AIF & FDs?

“Taxability” is one of the important aspects of investment, however, it comes in to the picture when investor books profit / redeem the investment. Though Taxation part should not be the only deciding factor, it is considerable as it affects the real (net) returns on investment. 

Tax implications affect your net investment returns. Here’s a simple guide to help you understand how your investments in FDs, equity funds, PMS, and AIFs are taxed.

Taxation depends on asset type and holding period. FD interest is taxed as per slab. Equity MFs have LTCG @12.5% (above ₹1.25L) and STCG @20%. PMS follows direct stock taxation. AIFs have pass-through or fund-level taxation based on the category.

In this blog, we are going to understand the taxation rules for different investment products.

Taxation on Fixed Deposits

Interest income from Bank Fixed Deposits is fully taxable. It gets added to your total annual income and get taxed as per your slab rates applicable. It is to be shown under the head ‘Income from Other Sources’ in your Income Tax Return. 

Please note that while crediting the interest, Banks deduct tax at source (TDS), if the amount of interest is beyond certain amount. In Budget 2025, the limit is increased for F.Y.2025-26. It is increased up to Rs. 50,000/- for individuals other than a senior citizen (earlier the limit was Rs. 40,000/-. In the case of senior citizen, the threshold is Rs. 1,00,000/- (earlier the limit was Rs. 50,000/-). 

The total interest amount will be taxable; however, the above-mentioned limits are just for TDS purpose. The rate of TDS is 10% is PAN number is available. 

Taxation on Mutual Fund

Now here comes the little complex part to understand. In this blog we will only cover “Equity” Asset Class.

Taxation on Equity Funds

Equity Mutual funds are those funds who invest at least 65% of total money (AUM of that particular fund) in stocks of Indian Listed Companies. Large-cap, Mid-cap, and Small-Cap, thematic funds, Value Funds as well as Aggressive Hybrid, Equity Saving, and Arbitrage Funds are all classified under "Equity" category.

The profit you earn form Equity can be divided in to two parts, Long-Term & Short-Term.

If you sell the Equity MF units after holding it for more than 12 months, it treats as “Long-Term”.  the long-term capital gains (LTCG) tax rate is 12.50%. However, it is only applicable to capital gains (profits) exceeding Rs 1.25 lakh.

On the contrary, if you sell the Equity MF units within the period of 12 months, it is considered as “Short-Term”. The tax rate is 20% for short-term capital gains (STCG).

Tax on Equity-Linked Savings Scheme (ELSS)

Mutual Funds Schemes under Equity Linked Savings Scheme (ELSS) category invest at least 80% of their net assets in equities. It your goal is to reduce taxes; this is the scheme you want. Money invested in an ELSS is deductible up to ₹1.5 lakh u/s 80C of the Income Tax Act, 1961 (under Old Regime only). Remember that section 80C itself has a cap of ₹1.5 lakhs. 

ELSS Schemes has a minimum three-year lock-in period. It means, once you invest in ELSS category, you will not be able to withdraw your money for 3 years. Hence, profits earned from ELSS category will attract LTCG tax and not STCG tax. In case of emergency, you can avail a loan against it.

Taxation on PMS (Portfolio Management Service)

Portfolio Management Services can invest in Equity & Debt, both the asset category. 

Listed Equity

Short-term Capital Gains: Tax rate applicable is 20% (if units sold within one year). (If assets sold on or after 23rd July 2024)

Long-term Capital Gains: Tax rate applicable is 12.5% (without indexation), applicable on gains exceeding ₹1.25 lakh in a financial year. (If assets sold on or after 23rd July 2024)

Debentures and Bonds

Gains from Debt Category (Debentures & bonds) can be categorised in to three parts i.e. Interest, STCG & LTCG.

• Interest Income is taxed as per your individual tax slabs.
• STCG is taxed according to your applicable income tax slab if held for less than 12 months.
• LTCG is taxed at 20% with indexation benefits provided the bonds are held for more than 12 months.

Taxation on AIF (Alternative Investment Fund)

Category 1 & 2 Alternative Investment Fund emphases on Unlisted securities, such as bonds or equity, come with specific tax implications. They provide pass-through taxation, which means that depending on the type of income received, investors pay taxes directly.

• Short-term capital gains (STCG) are taxed according to the investor's applicable income tax slab. Long-term capital gains (LTCG) are taxed at a flat rate of 12.5%.
• Any interest generated from unlisted securities is taxed at the investor’s personal income tax rate.
• Dividend income is taxed based on the individual's total dividend income for the year.

Category 3 AIFs emphases on listed securities, such as equities and derivatives, are typically taxed at the fund level. Here's a breakdown of the key tax implications:

• Short-term capital gains (STCG) are taxed at 20%. Long-term capital gains (LTCG) are taxed at 12.5% on profits.
• Income generated from derivatives is treated as business income and is taxed according to the investor’s applicable income tax slab.
• Dividend income is taxed based on the investor's applicable tax slab.

Tax Efficiency of AIF and PMS

Depending on the investor's tax status and the investment objective, both PMS and AIFs can provide tax efficiency. Due to the reduced LTCG tax rate, PMS investments may be more tax-efficient for investors with lower income tax slab rates.

 However, because they may be eligible for tax pass-through status and other tax advantages, AIFs might be more tax-efficient for investors with higher income tax rates.  In the end, an investor's overall financial objectives, risk tolerance, and tax status should all be carefully considered when assessing the tax consequences of PMS and AIF investments.

Conclusion

The taxation is not as complex as it may seem. The taxation mostly depends on the holding duration and the asset category (whether the scheme is debt- or equity-oriented). Hence, make your decision based on your financial objectives, risk capacity, returns expectations and consult your financial advisor.

Want to know more about tax implications. Reach out to us at +91 83900 40100 or support@bonvista.in. Our experts will guide you on tax-efficient investment strategies and personalised portfolio solutions to maximise your returns.