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Inflation and taxes are the two monsters that take away a part of returns on your mutual fund investments. You must plan your investments considering both the factors to avoid falling short of money for your goals. Here we will discuss the taxation part of mutual funds. Also keep in mind, tax rules keep on changing. You might need to revisit your mutual fund portfolio regularly to make changes to your investments to factor in any change in taxation rules. Here’s how the equity and debt mutual funds are taxed as per current rules : Taxation of equity-oriented mutual fund schemes A scheme that predominantly invests over 65% of the portfolio in equity shares in domestic companies is called an equity-oriented mutual fund scheme. > Long term capital gains on units held for more than 12 months are taxed at 10%, without indexation benefit. Long term capital gains upto ₹1 lakh are not taxed. > Short term capital gains on units held for 12 months or less are taxed at a flat rate of 15%. Taxation of debt mutual fund schemes Debt mutual funds and schemes that hold lesser than 65% of their total portfolio in equities also follow these taxation rules: > Long term capital gains on debt mutual fund units held for more than 36 months or three years are taxed at 20% after providing for indexation. Indexation is a process by which the purchase price of an asset is adjusted in a way to factor in inflation over the years. Indexation brings up the purchase price, reducing the overall gains on the investment for the purpose of taxation, which in turn results in lower taxes. Indexation reduces the tax outgo. > Short term capital gains on units held for 36 months or less are added to the income of the individual and taxed as per the applicable slab rate.