What is a mutual fund?

A mutual fund pools money from many people and invests it in shares, bonds, gold or a mix. You do not own the shares in your own demat account, one by one. You own units of the fund. The price of a unit is the net asset value, published for each business day.

The kind of fund decides the tax. An equity-oriented fund, one that meets the Act’s equity test, is taxed like listed equity when you sell. Hold the unit for not more than 12 months and section 196 charges 20%. Hold it longer and section 198 charges 12.5% on the year’s long-term gain above ₹1,25,000. A debt fund bought on or after 1 April 2023 is taxed at slab rates, under section 76, however long you held it. A fund that is mostly gold follows the gold rules, including the 12-month line if it is a listed gold ETF and the 24-month line if it is not.

Dividends, if you chose them, are taxed as income. A growth option leaves the gain inside the NAV until you sell. Neither option is a tax shelter by itself. The new regime does not give a deduction for buying a normal equity fund. An ELSS is the exception, and only in the old regime, inside the ₹1,50,000 cap, with a 3-year lock on each unit.

The return is not notified. PPF has a quarterly rate. A mutual fund has a portfolio. Past CAGR is a description of the past. A SIP projection is a what-if.

A worked example

₹10,000 a month into an equity fund for 15 years, at a planning rate of 12%, invests ₹18,00,000. The SIP engine’s value is ₹50,45,760, a gain of ₹32,45,760. Sold in one year, tax is ₹4,06,330 and the value after tax is ₹46,39,430. That is a projection at a rate you can change. It is not the fund’s last factsheet.

A single past stretch is a CAGR problem. ₹1,00,000 becoming ₹2,50,000 in 10 years is 9.6% on the CAGR calculator. Use the SIP calculator for the monthly plan and the capital gains calculator when you sell. The capital gains guide separates equity funds from debt funds.

Mistakes people make

• Assuming every mutual fund is taxed like shares.
• Claiming a deduction for a normal equity SIP in the new regime.
• Using one ₹1,25,000 exemption per fund. The exemption is for your year, across equity sales.
• Reading a dividend as tax-free because the fund already paid tax. The dividend is still your income.
• Comparing a fund’s one-year return with PPF’s 7.1% as if both were promised.

The section

Equity-fund units: section 196 (this was section 111A) and section 198 (this was section 112A), with the 12-month test in section 2(101). Debt funds bought on or after 1 April 2023: section 76. An ELSS deduction: section 123, Schedule XV, paragraph 1(m) (this was section 80C).