• either via the dividend paid out by the scheme, or
• via capital gain, which arises when you sell the units of the scheme.

At present, dividend earned from equity funds is tax free. Now, as per the Direct Tax Code (DTC), dividend from equity mutual funds will be taxed at the rate of 5 per cent. This will be deducted by the fund house itself before it is credited to your account. As for capital gains, the long-term capital gains (LTCG) tax on equity schemes remains zero, but tax rate on short-term capital gains (STCG) will be half the applicable income tax slab rate, as against the current rate of 15 per cent.

In case of debt-oriented mutual funds, the dividend received will be added to your income and taxed at normal slab rates as applicable. Earlier dividend from debt mutual funds was taxed at the rate of 12.5 per cent. As for capital gains tax, the tax rate will be the same for STCG and LTCG. Your gains will be added to your income and taxed according to the bracket you fall under.

Further, tax-saving ELSS (equity-linked saving schemes) funds will no longer get tax exemption under DTC.