Question

What is the treatment of 'unrealised gains' in mutual fund portfolios from a taxation perspective?

Accepted Answer

Unrealised gains (appreciation in NAV not yet converted to cash by redemption) are not taxable — capital gains tax arises only when units are actually redeemed by the investor — Mutual fund taxation follows the 'realisation principle' — capital gains are taxable only when gains are realised through actual redemption. Unrealised appreciation in NAV (as the portfolio rises) is not a taxable event. An investor holding units for 10 years without redeeming pays zero tax during those 10 years even though NAV may have tripled. Tax is triggered only at redemption — this deferral benefit is a key advantage of equity mutual fund investing.