9.1 Applicability of Taxes in Respect of Mutual Funds

NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam

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1 Chapter 1: Introduction & Exam Overview

1.1 About the NISM-Series-V-A Examination 1.2 The 12-Unit Curriculum Map and a Study Plan

2 Chapter 2: Investment Landscape

2.1 Investors and Their Financial Goals 2.2 Savings or Investments? 2.3 Different Asset Classes 2.4 Investment Risks 2.5 Risk Measures and Management Strategies 2.6 Behavioural Biases in Investment Decision Making 2.7 Risk Profiling 2.8 Asset Allocation and Do-It-Yourself versus Professional Help

3 Chapter 3: Concept and Role of a Mutual Fund

3.1 Concept of a Mutual Fund 3.2 Classification of Mutual Funds 3.3 Growth of the Mutual Fund Industry in India

4 Chapter 4: Legal Structure of Mutual Funds in India

4.1 Structure of Mutual Funds in India 4.2 Key Constituents of a Mutual Fund 4.3 AMC Organisation Structure and Service Providers 4.4 Role and Function of AMFI

5 Chapter 5: Legal and Regulatory Framework

5.1 Role of Regulators in India 5.2 Role of SEBI and the Mutual Fund Regulations 5.3 Due Diligence Process by AMCs for Distributors 5.4 Investor Grievance Redress Mechanism 5.5 AMFI Code of Conduct for Intermediaries

6 Chapter 6: Scheme Related Information

6.1 Mandatory Documents I: Scheme Information Document and Statement of Additional Information 6.2 Mandatory Documents II: Key Information Memorandum and the Advertisement Code 6.3 Non-Mandatory Disclosures

7 Chapter 7: Fund Distribution and Channel Management Practices

7.1 The Role and Importance of Mutual Fund Distributors 7.2 Different Kinds of Mutual Fund Distributors 7.3 Modes of Distribution 7.4 Pre-requisites to Become a Distributor of a Mutual Fund 7.5 Revenue for a Mutual Fund Distributor 7.6 Commission Disclosure Mandated by SEBI 7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor

8 Chapter 8: Net Asset Value, Total Expense Ratio and Pricing of Units

8.1 Fair Valuation Principles 8.2 Computation of Net Assets of a Scheme and NAV 8.3 Dividends and Distributable Reserves 8.4 Entry and Exit Load and Its Impact on NAV 8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies 8.6 Key Accounting and Reporting Requirements 8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio

9 Chapter 9: Taxation

9.1 Applicability of Taxes in Respect of Mutual Funds 9.2 Capital Gains on Mutual Fund Units 9.3 Dividend (IDCW) Income and Tax Deducted at Source 9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units 9.5 Setting Off Capital Gains and Losses under the Income Tax Act 9.6 Tax Benefit under Section 80C and Applicability of GST

10 Chapter 10: Investor Services

10.1 The New Fund Offer Process 10.2 New Fund Offer Price and Ongoing Offer Price for Subscription 10.3 Investment Plans and Services 10.4 Allotment of Units and Account Statements 10.5 Mutual Fund Investors: Who Can Invest 10.6 Filling the Application Form for Mutual Funds 10.7 Financial Transactions with Mutual Funds 10.8 Cut-Off Time and Time Stamping 10.9 KYC Requirements for Mutual Fund Investors 10.10 Systematic Transactions and Their Operational Aspects 10.11 Non-Financial Transactions, Special Investor Categories and Turnaround Times

11 Chapter 11: Risk, Return and Performance of Funds

11.1 General and Specific Risk Factors 11.2 Factors That Affect Mutual Fund Performance 11.3 Drivers of Returns and Risk in a Scheme 11.4 Measures of Returns 11.5 SEBI Norms Regarding Representation of Returns 11.6 Risks in Fund Investing: The Investor's Perspective 11.7 Measures of Risk and Provisions Relating to Credit Risk

12 Chapter 12: Mutual Fund Scheme Performance

12.1 Benchmarks and Performance 12.2 Price Return Index or Total Return Index 12.3 Basis of Choosing an Appropriate Performance Benchmark 12.4 Benchmarks for Equity Schemes 12.5 Benchmarks for Debt Schemes and Other Schemes 12.6 Quantitative Measures of Fund Manager Performance 12.7 Tracking Error and Scheme Performance Disclosure

13 Chapter 13: Mutual Fund Scheme Selection

13.1 Scheme Selection Based on Investor Needs, Preference and Risk Profile 13.2 Risk Levels in Mutual Fund Schemes 13.3 Scheme Selection Based on Investment Strategy 13.4 Selecting a Scheme Across AMCs or Within a Scheme Category 13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts

9.1 Applicability of Taxes in Respect of Mutual Funds

Key Takeaways Explain This Topic AI

A SEBI-registered mutual fund is exempt from income tax on its own income, so tax arises only in the investor's hands.

Buying and selling securities inside a scheme creates no tax event for the investor.

An equity-oriented scheme is one investing at least 65% in equity shares of domestic companies.

Tax treatment turns on the scheme's classification, the holding period, and when the units were acquired.

Investors are taxed only on distributions received and on gains realised when units are redeemed or switched.

Last updated: August 2026

The Fund Pays No Tax

A mutual fund registered with SEBI is exempt from income tax on its own income . Interest earned, dividends received and capital gains realised inside a scheme attract no tax at the fund level.

This single fact produces the most valuable and least understood feature of mutual fund investing:

A fund manager can sell every holding in the portfolio and the investor incurs no tax.

Compare a direct equity investor who rebalances a portfolio: every sale is a taxable event, and tax paid reduces the amount left to reinvest. Inside a mutual fund, the manager can rebalance, exit a stock entirely, shift the whole duration profile of a debt portfolio — and the investor's tax position is untouched. Tax deferral of this kind compounds substantially over long holding periods.

Only Two Taxable Events for the Investor

Event Treatment
Receiving an IDCW distribution Taxed as income at the investor's slab rate
Redeeming, switching or transferring units Capital gains tax, depending on classification and holding period

Everything else is invisible for tax. A rising NAV creates no liability. A change of fund manager creates none. Nor does moving between options within the same plan, if it does not involve redemption and reallotment.

A switch is a redemption. Investors consistently misunderstand this. Switching from one scheme to another, or from a regular plan to a direct plan, or between growth and IDCW options, involves redeeming units of one and purchasing units of the other. It is a taxable redemption , and any exit load applies too. A distributor recommending a switch must state this before it is executed.

The Classification That Drives Everything

Tax outcomes depend on which of three buckets a scheme falls into.

Equity-oriented scheme

A scheme investing a minimum of 65% of its total proceeds in equity shares of domestic companies , computed on the annual average of the monthly averages of opening and closing figures.

This catches equity schemes, aggressive hybrid schemes, arbitrage funds and equity savings funds. Note the qualifier domestic : a scheme investing 90% in overseas equities is not equity-oriented for Indian tax purposes, a point that regularly surprises investors in international funds.

Specified Mutual Fund

Defined under section 50AA . Following the amendment effective from assessment year 2026-27, a Specified Mutual Fund is one investing more than 65% of its total proceeds in debt and money market instruments , or a fund investing 65% or more of its total proceeds in units of such a fund , measured on an annual average basis.

The definition changed materially. It previously caught any fund investing not more than 35% in domestic equity , a much wider net that swept in gold ETFs, gold fund of funds and international funds. Under the current definition those schemes fall outside section 50AA. Material written before the amendment lists them as Specified Mutual Funds and is now wrong.

Other schemes

Everything caught by neither definition: gold ETFs, gold and international fund of funds, and hybrid schemes holding between 35% and 65% in domestic equity.

Summary of the Framework

Classification Test Where taxed
Equity-oriented At least 65% in domestic equity shares Sections 111A and 112A
Specified Mutual Fund More than 65% in debt and money market instruments Section 50AA — always short-term
Other Neither of the above General capital gains provisions
Who Is Taxed
Resident individuals and HUFs — as set out in this chapter

Non-residents — same classification framework, but subject to tax deducted at source under section 195 on both distributions and capital gains, and to any applicable Double Taxation Avoidance Agreement

Corporates and firms — capital gains under the same rules; distributions taxed as income
Certain exempt entities — some trusts, funds and institutions have their own exemptions
Two Cautions for a Distributor

Tax law changes every year. Rates, thresholds and definitions have moved substantially in recent Finance Acts, and material more than a year old should be checked rather than trusted. The Statement of Additional Information carries the fund's tax summary, but it too is updated only annually.

A distributor is not a tax adviser. Explaining the general framework is part of the job. Computing an investor's liability, advising on set-off across other income, or opining on regime choice is not, and an investor with a complex position should be referred to a chartered accountant. The examinable framework is what follows in this chapter; the individual computation is somebody else's responsibility.