NISM-Series-V-A: Mutual Fund Distributors · Taxation

Securities Transaction Tax and TDS for Mutual Funds

Updated 11 October 2026 · Fact-checked

STT is a tax on transactions in equity-oriented fund units, charged at 0.001% on redemption and nil on purchase. TDS is tax deducted at source. Residents face TDS only on dividends above the threshold. For NRIs, the AMC deducts TDS on capital gains at the applicable rate. Rates follow the Finance Act in force.

Understand Securities Transaction Tax and TDS for Mutual Funds

Securities Transaction Tax (STT) is a tax on the value of certain transactions in securities. It applies to equity-oriented mutual fund units. It is paid at the time of the transaction, not at the time of filing a tax return.

For an equity-oriented fund, STT on redemption (sale) of units is 0.001% of the value, borne by the investor. There is no STT on purchase of units. There is no STT on redemption of debt fund units. The fund also pays STT when it buys and sells shares in its portfolio. That cost sits inside the scheme and affects the NAV, not your bill.

STT matters for another reason. Concessional capital gains rates on equity-oriented funds (20% short-term, 12.5% long-term above the annual exemption limit) apply only where STT has been paid on redemption. STT itself is not deductible when you compute capital gains.

TDS means the payer deducts tax before paying you. For a resident investor, there is no TDS on capital gains from mutual fund units. TDS applies to dividend (IDCW) when it exceeds ₹10,000 in a financial year, at 10%. If PAN is not given, a higher rate of 20% applies.

For a non-resident investor (NRI), the AMC must deduct TDS on capital gains when paying redemption proceeds, because the NRI's tax liability cannot be easily collected later. The rate depends on whether the fund is equity-oriented and whether the gain is short-term or long-term. Surcharge and cess are added. Dividends paid to NRIs also carry TDS, at 20% plus surcharge and cess.

Key formulas to remember

STT on equity fund redemption: STT = Redemption value × 0.001%; Paid by the investor on sale of equity-oriented units. Nil on purchase and nil on debt fund redemption.
STT on purchase of units: Nil; No STT is charged when you buy equity-oriented fund units from the AMC.
Resident TDS on dividend (IDCW): 10% if dividend > ₹10,000 in a financial year; 20% if PAN is not furnished. No TDS on resident capital gains.
NRI TDS on equity fund gains: Short-term 20%; Long-term 12.5%; Plus applicable surcharge and cess. AMC deducts at redemption.
NRI TDS on non-equity fund gains: Short-term 30%; Long-term 12.5%; Plus surcharge and cess. Always check the rate in the Finance Act in force.
NRI TDS on dividend: 20% plus surcharge and cess; Deducted by the AMC before paying IDCW.

How to solve Securities Transaction Tax and TDS for Mutual Funds questions

Use this order for any STT or TDS question. Most wrong answers come from skipping the first two steps.

1Identify the fund type: equity-oriented or debt/other.
2Identify the transaction: purchase, redemption, or dividend (IDCW).
3Identify the investor: resident or NRI.
4If the question asks about STT, apply it only to redemption of equity-oriented units at 0.001%. Purchase is nil.
5If the question asks about TDS for a resident, remember capital gains carry no TDS; only dividend above ₹10,000 does.
6If the investor is an NRI, pick the rate by fund type and holding period (short-term or long-term).
7Compute the amount and check whether the question asks to include surcharge and cess.
8Eliminate options that apply STT on purchase or TDS on resident capital gains.

Quickest way: Three-question filter

When to use it: Use it for any MCQ asking who pays, what rate or whether tax applies.

Ask: Is it STT or TDS? STT is on the transaction, TDS is on the payment.
Ask: Resident or NRI? Resident capital gains have no TDS; NRI capital gains do.
Ask: Equity or non-equity? Equity-oriented funds get the lower 20% and 12.5% rates and STT; debt funds have no STT.
Recall the anchors: STT 0.001% on redemption, nil on purchase; resident dividend TDS 10% above ₹10,000.

Common mistakes in Securities Transaction Tax and TDS for Mutual Funds

Charging STT on purchase of equity fund units.
Students link STT with buying shares on an exchange, where it applies on both sides.
Fix: For fund units bought from the AMC, STT is nil on purchase. It applies only on redemption of equity-oriented units.
Applying STT to debt fund redemption.
Students assume all mutual funds carry STT.
Fix: STT applies to equity-oriented funds only. Debt fund redemptions carry no STT.
Deducting TDS on a resident investor's capital gains.
Students mix up resident rules with NRI rules.
Fix: A resident has no TDS on mutual fund capital gains. They pay tax through return filing or advance tax.
Forgetting the dividend TDS threshold for residents.
Students remember the 10% rate but not the condition.
Fix: TDS applies only when dividend exceeds ₹10,000 in a financial year. Below that, no TDS.
Treating STT as deductible while computing capital gains.
Students think any tax paid on a sale reduces the gain.
Fix: STT is not allowed as a deduction. But paying it is the condition for equity-oriented concessional rates.
Using the equity rate for an NRI redeeming a debt fund.
Students do not check the fund type before picking the rate.
Fix: Check fund type first. Non-equity short-term gains for an NRI attract 30% TDS, not 20%.

Worked examples

Example 1

An investor redeems units of an equity-oriented fund worth ₹5,00,000. What is the STT payable? (a) ₹5 (b) ₹50 (c) ₹500 (d) ₹5,000

Show the solution

The fund is equity-oriented and the transaction is a redemption, so STT applies.
The rate is 0.001% = 0.001 ÷ 100 = 0.00001.
STT = ₹5,00,000 × 0.00001 = ₹5.

Answer: (a) ₹5

Example 2

An NRI redeems units of an equity-oriented fund and has a long-term capital gain of ₹4,00,000. Assume the AMC deducts TDS on the full gain and ignore surcharge and cess. What is the TDS? (a) ₹40,000 (b) ₹50,000 (c) ₹80,000 (d) Nil

Show the solution

The investor is an NRI, so the AMC deducts TDS on capital gains.
The fund is equity-oriented and the gain is long-term, so the rate is 12.5%.
TDS = ₹4,00,000 × 12.5% = ₹50,000.
Nil is wrong because it applies only to a resident's capital gains. ₹80,000 uses the 20% short-term rate.

Answer: (b) ₹50,000

Exam tips

Memorise the anchors: 0.001% STT on equity fund redemption, nil on purchase, nil on debt funds.
Read the investor status first. Resident versus NRI changes the answer.
Watch for 'ignore surcharge and cess'. If it is not stated, the answer may mention that they are extra.
Expect trap options that put STT on purchase or TDS on resident capital gains.
Rates change with the Finance Act. Answer according to the rates in your NISM workbook version.

Practice questions from Taxation

Securities Transaction Tax and TDS for Mutual Funds: frequently asked questions

What is STT on equity mutual fund redemption?

It is a tax of 0.001% on the redemption value of equity-oriented fund units, paid by the investor. It is collected at the time of redemption. You cannot deduct it while computing capital gains.

Is there STT when I buy mutual fund units?

No. Purchase of equity-oriented units from the AMC carries no STT. STT arises only on redemption of equity-oriented units.

Is TDS deducted on mutual fund capital gains for NRIs?

Yes. The AMC deducts TDS on capital gains of NRIs at the time of redemption. The rate depends on whether the fund is equity-oriented and whether the gain is short-term or long-term, plus surcharge and cess.

Do residents have TDS on mutual fund gains?

Not on capital gains. Residents have TDS only on dividend (IDCW) above ₹10,000 in a financial year, at 10%. A higher rate applies if PAN is not provided.