Taxation rules on equity and equity-oriented funds are fairly simple. A holding period of more than 12 months qualifies as long-term holding; less than that is short term.
Equity-oriented funds have no tax on long-term capital gains; i.e., if you sell your fund after 12 months from the date you bought it, you don’t pay capital gains tax. On short-term holding, the capital gains tax is a flat 15 per cent, no matter which tax bracket you belong to. Securities transaction tax (at 0.001%) will apply on all redemptions of equity schemes. That is about one paisa for every Rs 1000 of redeemed money and hence ignorable.
All dividends from equity funds are exempt from tax, irrespective of when you receive it.
To qualify as an equity-oriented scheme as per tax rules, the fund should have at least 65 per cent of its portfolio in domestic equity shares on an average. By this definition, equity-oriented balanced funds are also tax-free after a one-year holding period, just like equity funds. They are also taxed at 15 per cent for short-term capital gains. Similarly, arbitrage funds and equity savings funds are also treated as equity for tax purposes.
International funds that invest in the stocks of other markets such as the US or Europe, will not be an equity fund as they do not hold domestic stocks to the extent of 65% (as required by tax laws). Equity fund-of-fund schemes do not enjoy the tax benefits of equity funds because they don’t hold stocks; they hold other funds.