How Much Do You Lose To Taxes When You Withdraw From Mutual Funds?

It depends on how long you stayed invested and whether you have invested in equity mutual funds or debt mutual funds.

Let’s talk about Equity funds first

Equity is meant for long term investing, implying that you usually put that money in it, which you are not likely to require for the next 5-7 years at least.

However, if you decide to withdraw money sooner, specifically within 1 year of making an equity investment, then your gain will be taxed at flat 15% (this is called short-term capital gains tax). This rate does not depend on your income slab.

If you withdraw from your equity MF units after 12 months, the gain, called long term capital gain, will be taxed at 10%.

It is important to understand that only gain is taxed. This is best understood with an example.
Let’s say you invested Rs 10,000. 
This grew to say Rs 20,000 in 4 years.
You decided to withdraw Rs 10,000.
When you withdraw this amount, you are withdrawing both principal (Rs 5000) and gain (Rs 5000)

In case of debt funds

You typically invest in debt MFs for your short term needs or money which you would need in the next 1-5 years.

If you withdraw from your debt funds before 3 years, the profit on the withdrawn units will be taxed at the rate for your income slab.

Whereas, if you do so after 3 years, then you pay tax at the rate of 20% after indexation. In simple terms, Indexation ensures that you pay tax only on the profits that exceed the rate of inflation and therefore the actual tax you pay is very little.

Regular monthly (SIP) investors

The period of holding is calculated separately for each month’s investment and not from start or end date. So if you invest in equity mutual funds every month from January to December of 2017, in January of 2018, 1/12th of your investment will be 1 year old, another 1/12th will be 11 months old and so on, with the amount you invested in December 2017 is only 1 month old. Therefore only 1/12th of your investment is long term and the rest is short term.

Takeaway

Capital gains tax can impact your gains significantly if you redeem your investment without keeping the time horizon in mind. If you invest in equity, hold for at least a year and in the case of debt, 3 years is ideal to minimize the tax hit (but there is no avoiding it).