Bonus units in mutual funds are taxed when you sell them. There is no tax at the time of receiving bonus units. But when you sell, the cost of acquisition for bonus units is considered zero, which means the entire selling price is treated as capital gain. This gain is taxed as either short-term or long-term capital gain depending on your holding period.

Are Bonus Units in Mutual Funds Tax-Free?

Bonus units themselves are not taxed when they are allotted. You do not pay any tax when mutual funds give you bonus units. However, tax is applicable when you sell these units. The entire value of the sale is treated as capital gain since the cost of acquisition is considered zero.

How Are Capital Gains on Bonus Units Calculated?

Capital gains on bonus units are calculated using zero as the cost of acquisition. So, if you sell bonus units for ₹10,000, the entire ₹10,000 is treated as capital gain. If you hold these units for more than 12 months in equity funds, it is long-term capital gain (LTCG). If sold before 12 months, it is short-term capital gain (STCG).

What is the Tax Rate on Selling Bonus Units?

If bonus units are held for more than 12 months in equity mutual funds, the gains are taxed at 10% if the total LTCG exceeds ₹1 lakh in a financial year. For short-term (less than 12 months), the tax rate is 15%. For debt funds, long-term gains are taxed at 20% with indexation, and short-term gains are added to your income and taxed as per your slab.

When Should You Sell Bonus Units to Save Tax?

To save tax, try to hold bonus units in equity funds for more than one year. This way, you pay 10% LTCG tax only if your total capital gains cross ₹1 lakh. In debt funds, consider holding for more than 3 years to benefit from indexation and lower tax rates. Timing your sale smartly can reduce your overall tax burden.

Is There a TDS Deducted on Bonus Unit Redemption?

No, there is no TDS (Tax Deducted at Source) on redemption of mutual fund units, including bonus units, if you are a resident individual. You need to report the gains in your Income Tax Return (ITR) and pay tax accordingly. However, for NRIs, TDS may be applicable based on income tax laws.

How to Show Bonus Unit Capital Gains in ITR?

You need to declare the capital gains from selling bonus units under the ‘Capital Gains’ section in your ITR. If it is short-term, include under STCG, and if it is long-term, under LTCG. Mention the sale value as your full gain since the cost of bonus units is zero. Use AIS and CAMS/NSDL statements to track and match all your mutual fund transactions.