A guide to taxation on Nifty 50 index funds

Posted On: 20 March 2025

The Union Budget 2024 introduced significant changes to the taxation of equity investments, including Nifty 50 index funds. These changes have altered the landscape for investors, impacting both short-term and long-term capital gains taxation. While the government has raised the tax-free exemption limit for long-term capital gains (LTCG) to Rs. 1.25 lakh, it has also increased tax rates for both short-term and long-term gains.

For investors in Nifty 50 index funds, these changes necessitate a reevaluation of strategies to maximise post-tax returns.

Table of contents

Taxes applicable on Nifty 50 index funds
How are Nifty 50 index funds taxed?
Nifty 50 index fund tax saving strategies
How to calculate tax on Nifty 50 index fund investments?

Taxes applicable on Nifty 50 index funds

Investing in Nifty 50 index funds involves two primary types of taxes: capital gains tax and dividend tax. Here’s how these taxes have changed post-Budget 2024.

1. Capital gains tax

Short-term capital gains (STCG): Gains from units held for less than 12 months are now taxed at an increased rate of 20% (up from 15% earlier).
Long-term capital gains (LTCG): Gains from units held for more than 12 months are taxed at a higher rate of 12.5% (previously 10%), with an increased exemption limit of Rs. 1.25 lakh per financial year.

Apart from this, surcharge and health and education cess of 4% are applicable.

2. Dividend tax

Income distributed through Income Distribution cum Capital Withdrawal (IDCW) in Nifty 50 index funds is taxable as per your income tax slab rate.
Tax Deducted at Source (TDS) at a rate of 10% is applicable if IDCW income exceeds Rs. 5,000 in a financial year.

How are Nifty 50 index funds taxed?

Capital gains: These are taxed at the time of redemption. The difference between the per-NAV purchase price and sale price is the capital gain. The holding period is determined based on the date on which units were purchased. In the case of SIP, the units may have been purchased over multiple days. In this case, the First In First Out (FIFO) system is typically followed. This means that the oldest units are sold first (the earliest purchased SIP instalment units). The holding period is determined based on the purchase date of the redeemed units.
IDCW income: IDCW payouts are added to your total taxable income and taxed as per your applicable slab rate.

Nifty 50 index fund tax saving strategies

Hold a long investment horizon: Hold on to your units for at least a year to qualify for the relatively lower LTCG tax.
- Leverage the LTCG exemption limit: The exemption limit for LTCG has been raised from Rs. 1 lakh to Rs. 1.25 lakh. By strategically realising gains below this threshold each year, you can effectively reduce or eliminate LTCG tax liability.
Opt for growth plans over IDCW plans: Growth plans reinvest earnings back into the fund. This not only enhances growth potential but also avoids the slab-rate taxation applicable to IDCW payouts.
Focus on long-term investments: Holding your investments for more than one year qualifies them for LTCG taxation at a lower rate (12.5%) compared to STCG (20%).
Tax loss harvesting: This involves selling investments at a loss to offset taxable capital gains, reducing your tax liability. You can reinvest in a similar asset to stay invested while still benefiting from the tax savings.

How to calculate tax on Nifty 50 index fund investments?

Determine holding period
- Identify whether your investment qualifies as short-term (less than one year) or long-term (more than one year).
Calculate capital gains
- Subtract the purchase price from the selling price.
- For LTCG, deduct Rs. 1.25 lakh (if applicable) before applying the tax rate of 12.5%.
- For STCG, apply a flat rate of 20%.
*This calculation excludes surcharge and health and education cess of 4%
Include IDCW income
- Add any IDCW payouts (if applicable) received during the financial year to your total taxable income.
- Apply your applicable income tax slab rate to calculate dividend tax liability.
Account for TDS
- Deduct any TDS paid by the fund house on dividends before computing final liability.

Conclusion

As an investor in Nifty 50 index funds, it’s essential to adapt your strategies in light of these changes—whether by holding investments longer, opting for growth plans over dividends, or leveraging exemptions effectively. Diversifying across asset classes may also help mitigate higher equity taxation while maintaining portfolio efficiency.

FAQs:

What are the different types of taxes levied on Nifty 50 Index Funds?

Nifty 50 index funds are subject to the following:

Short-term capital gains tax: 20%
Long-term capital gains tax: 12.5%, with an exemption of Rs. 1.25 lakh.
IDCW income: Taxed as per individual income slabs, with TDS applicable above Rs. 5,000 annual income.

How are dividends from Nifty 50 index funds taxed?

The fund does not give dividends, it may give payouts at intervals for investors who opt for IDCW payout. This income is added to your total taxable income and taxed according to your slab rate. Additionally, TDS at a rate of 10% is deducted if this income exceeds Rs. 5,000 annually.

Can I save tax by investing in Nifty 50 Index Funds?

Yes, you can save taxes by:

Holding investments for over one year to benefit from lower LTCG rates.
Leveraging the Rs. 1.25 lakh LTCG exemption limit.
Opting for growth plans instead of dividend plans.

Are online tax calculators reliable for computing index fund taxes?

Online calculators provide quick estimates but may not account for nuances like exemptions or deductions specific to individual cases. It’s advisable to consult a financial advisor.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.