Under the Indian Income Tax Act, 1961, what is the statutory tax status of income (dividends, interest, and capital gains) earned directly by a SEBI-registered mutual fund scheme?

[ A ]Taxed at a flat rate of 30% plus surcharge and cess on every trading transaction.

[ B ]Subject to mandatory 10% corporate dividend distribution tax paid directly by the scheme.

[ C ]Taxable only if the scheme manages assets in excess of Rs. 10,000 crore.

[ D ]Completely exempt from income tax in the hands of the mutual fund under Section 11 (the erstwhile Section 10(23D)).[ CORRECT ]

Takeaway

Option D is correct: Completely exempt from income tax in the hands of the mutual fund under Section 11 (the erstwhile Section 10(23D)).

Derivation

Under Section 11 of the Income-tax Act, 2025 (the erstwhile Section 10(23D) of the Income-tax Act, 1961), all income earned by a mutual fund registered with SEBI—including dividend income from portfolio companies, interest from debt securities, and realized capital gains from market trading—is completely exempt from income tax. Because mutual funds are constituted as trusts, they act as pure pass-through investment vehicles, with tax liabilities arising only in the hands of individual unitholders upon distribution or redemption. This tests fund-level taxation. The common mistake is believing mutual funds pay corporate tax on internal portfolio gains.

Why the others fail

A — Taxed at a flat rate of 30% plus surcharge and cess on every trading transaction.

Mutual funds are tax-exempt trusts under Section 11 of the Income-tax Act, 2025 (the erstwhile Section 10(23D) of the Income-tax Act, 1961) and do not pay 30% corporate income tax on portfolio trading profits.

B — Subject to mandatory 10% corporate dividend distribution tax paid directly by the scheme.

Dividend Distribution Tax (DDT) at the mutual fund scheme level was completely abolished in the Union Budget 2020.

C — Taxable only if the scheme manages assets in excess of Rs. 10,000 crore.

Section 11 of the Income-tax Act, 2025 (the erstwhile Section 10(23D) of the Income-tax Act, 1961) tax exemption applies universally to all SEBI-registered mutual fund schemes regardless of asset size.