How to earn tax-free regular income from mutual funds in India

Posted by on February 25, 2015 in Financial Matters | 0 comments

As of date the following are the ways of earning tax free dividends from your savings invested in Indian mutual funds:
• Invest your money in Equity or Equity-oriented (at least 65% of the asset under management must be invested in equities) funds that pay regular dividends. Some of these equity-oriented funds are also known as balanced funds.
• Invest in Arbitrage funds. Since the arbitrage funds are mainly invested in equities, they are, as of now, considered as equity funds. However, some recent reports suggest that these may change in the immediate future.
Dividends or long-term capital gains (the money has to be invested for a period of at least one year in this case) from all such funds are tax-free till date. However, in an unpredictable tax regime such as we have here in India, laws may change.

It is to be noted that earnings from your investments in all the debt funds or debt-oriented funds (where the equity portion is less than 65%) will be taxed, either by means of the Dividend Distribution Tax (DDT) or short/long term capital gains. International equity funds, even when their entire assets are invested in equities, have the same tax treatment as debt funds.

It is quite possible then to build your equity or equity-related mutual funds portfolio over many years or even decades and enjoy tax-free dividends or incomes. One equity fund that pays regular dividends, namely BNP Paribas Dividend Yield fund, has been reviewed in this blog. A good arbitrage fund in this regard is IDFC Arbitrage Fund.


To earn tax-free regular income from such funds, you can opt for the Dividend options of the respective funds or start an SWP (Systematic Withdrawal Plan) one year from the date of your investment. To enjoy long-term capital gains benefits, you need to invest your money for at least a year.

[Caveat: The suggestions made in this post are based on my personal knowledge and experience. Readers are requested to make their own assessments before investing.]

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