Specified Mutual Fund
Also written SMF · Specified Mutual Fund (SMF) · Section 50AA fund
A mutual fund caught by section 50AA — gains on it are short-term no matter how long it was held, and are taxed at the investor's slab rate.
In plain language
Holding period normally decides whether a gain is short-term or long-term. A Specified Mutual Fund is the category where that rule is switched off.
Under section 50AA, gains on the transfer, redemption or maturity of an SMF are deemed short-term irrespective of the period of holding. Hold the units for a month or for nine years — the answer is the same, and the gain goes into the slab.
The workbook describes two SMF populations, and keeping them apart is most of the work.
How it works
Type 1 — the debt funds. A mutual fund where at least 65% of the total proceeds are invested in debt or money market instruments, directly or indirectly through another fund, and which was bought on or after 1 April 2023.
Type 2 — the limited edition. Any other fund that had invested less than 35% of its proceeds directly in equity shares of Indian companies, bought on or after 1 April 2023 but sold or redeemed before 1 April 2025. The workbook names the usual residents of this box: debt-oriented hybrid funds not caught by Type 1, gold or silver funds, international securities funds, and fund of funds bought and sold inside that window.
The prospective cut-off. Section 50AA applies only to units acquired on or after 1 April 2023. Units acquired on or before 31 March 2023 are taxed as any other mutual fund — the ordinary holding-period rules apply to them.
The computation. Full value of consideration, less cost of acquisition of units, less expenditure incurred wholly and exclusively in connection with the transfer, redemption or maturity. The result is short-term capital gain, taxed at the rates applicable to the assessee.
The workbook also records that cost of improvement is not allowed to be added for market linked debentures or specified mutual funds.
A worked example
Mr Bhattacharya holds two debt funds and redeems both in March 2025 with an identical Rs 1,50,000 gain. He is in the 30% slab.
| Fund P — units bought 10 Feb 2023 | Fund Q — units bought 10 June 2023 | |
|---|---|---|
| Holding period | 25 months | 21 months |
| Section 50AA? | No — acquired before 01-04-2023 | Yes |
| Nature of gain | Long-term (units listed, held > 12 months) | Short-term, regardless of holding |
| Rate | 12.5% | 30% slab |
| Tax | Rs 18,750 | Rs 45,000 |
Same fund category, same gain, same investor, same redemption date — Rs 26,250 of difference, decided entirely by a purchase date four months apart.
The workbook's own contrast is Example 12 in Chapter 10: 1,000 units of a debt-oriented mutual fund bought on 01-01-2017 at Rs 150 and sold on 15-03-2025 at Rs 300. Because those units predate 1 April 2023, section 50AA never touches them; the Rs 1,50,000 gain is long-term and taxed at 12.5%.
Why NISM asks about it
Chapter 10 (Taxation of Debt Products), sections 10.3.2 to 10.3.6, builds the four-way classification of mutual funds for tax and then works through each. The examinable points are the four-way split itself, the 1 April 2023 acquisition cut-off, and the fact that section 50AA overrides the holding period. Expect a question that gives you a purchase date on either side of 1 April 2023 and asks for the nature of the gain.
Common exam traps
- Section 50AA is prospective. Units acquired on or before 31-03-2023 are untouched by it — the commonest slip in this chapter.
- Deemed short-term is not the same as "held for less than 12 months". The holding period is irrelevant; write "short-term by virtue of section 50AA".
- Type 1 is a 65% debt test; Type 2 is a less-than-35% equity test. They are different thresholds measuring different things.
- Type 2 closed on 1 April 2025. A gold fund bought in 2023 and sold after that date is not a Type 2 SMF.
- "65% in debt, directly or indirectly" — a fund of funds feeding a debt fund is caught.
- Cost of improvement is not deductible for an SMF, unlike a general capital asset.
- No indexation, and no Rs 1,25,000 exemption — those belong to other categories entirely.
Check yourself
1.From FY 2023-24, into how many categories are mutual funds classified for taxation purposes?
- a)Two — equity-oriented and other funds
- b)Three
- c)Four — equity-oriented, Specified Mutual Funds Type 1, Specified Mutual Funds Type 2, and all other mutual funds
- d)Seven, matching the portfolio classifications
Show the answer
Answer: (c) Four — equity-oriented, Specified Mutual Funds Type 1, Specified Mutual Funds Type 2, and all other mutual funds
Until FY 2022-23 mutual funds were categorized into TWO types for taxation — equity-oriented and other funds. With effect from FY 2023-24 and subsequent amendments they are classified into FOUR types: equity-oriented mutual funds, Specified Mutual Funds Type 1 (65 per cent or more in debt, bought after 1 April 2023), Specified Mutual Funds Type 2 (the limited-edition category), and all other mutual funds.
2.A debt-oriented mutual fund investing 82 per cent in debt was bought on 10 March 2023 and sold in June 2025 at a gain. How is the gain taxed?
- a)As a short-term capital gain, since all debt funds are now short term
- b)As a long-term capital gain at 12.5 per cent, because section 50AA applies only to units acquired on or after 1 April 2023
- c)As a short-term capital gain at 20 per cent
- d)It is exempt as the fund is debt oriented
Show the answer
Answer: (b) As a long-term capital gain at 12.5 per cent, because section 50AA applies only to units acquired on or after 1 April 2023
The workbook states that section 50AA applies PROSPECTIVELY to SMFs acquired on or after 01-04-2023, and that SMFs acquired on or before 31-03-2023 will be subject to taxation as per the normal provisions as applicable in the case of any other mutual fund. Section 50AA will NOT apply to such specified mutual funds acquired on or before 31-03-2023. Bought three weeks before the cut-off and held over 24 months, this is a long-term gain at 12.5 per cent.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- Market Linked DebentureA debenture whose return is linked to an underlying index or security rather than being a fixed coupon; since Section 50AA its gains are short-term capital gains taxed at slab, whatever the holding period.
- Equity-oriented fundA fund that puts at least 65% of its proceeds into listed domestic equity shares — the tax definition that unlocks the 12.5% long-term rate and the Rs 1,25,000 annual exemption.
- Systematic Withdrawal PlanA standing instruction to redeem a set amount — or only the appreciation — from a mutual fund scheme at a chosen frequency, used to manufacture a regular income in retirement.