There is lot of confusion among many of us about Taxation for Non-ELSS Mutual Funds. Let us try to answer this question
Neel in one of his comments asked
… Not sure if you have any article which explains Income Tax deduction and other charges involved for non-ELSS MFs. This info would be very helpful.
First for open ended non-ELSS mutual funds there is no time limit i.e. you can invest in the fund at any time and redeem the same any time. So assuming there is some gain when you are redeeming your mutual funds you have the following two scenarios.
If you redeem before one year of your purchase date you are eligible for short term gain and so the income is actually added to your other incomes and you pay tax accordingly. Under section 111A, for shares or mutual funds where STT is paid, for Asst Yr 2009-10 the tax rate is 15%.
If you redeem after one year if your purchase date you are eligible for long term gain and as of now ( Before New Direct Tax Code ) equity investment with time frame of more than one year are tax free.
For dividend option the amount you receive as dividend is tax free but for gains we apply the same rules above.
Remember that I am not your tax consultant. You should consult tax expert for calculating your taxable income. I am just providing views about the same and may not cover all areas for calculating the right taxable income for everybody. Still if you have more questions post them in comments.