TAX ON MUTUAL FUNDS

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TAX ON MUTUAL FUNDS

TAX ON MUTUAL FUNDS

Taxation plays a very important role in the returns generated by your investment and so you should know how the investment is taxed before you choose one. The primary aim of any investment is to earn make money out of it. Investing in mutual funds generates capital gains, which can be taxable.

In this article, let us discuss the tax implications of various mutual fund types. 

TYPES OF MUTUAL FUNDS:

The capital gains tax on mutual fund returns depend on which type of fund it is equity or debt. Similarly, the tax on dividend from mutual funds also depends on fund type.

  1. 1. Equity Mutual Funds: Schemes investing more than 65% of its assets in shares of Indian Listed Rs. 1 lakh a year is granted tax free on equity investments

If you had invested equity mutual funds or shares before 31 January 2018, gains till that date will be considered as grandfathered and will be exempt from tax

 

  1. Non Equity Mutual Funds– All other Schemes which do not qualify as Equity Funds by above definition. This includes Debt Funds, International Funds of Funds, Gold Funds, Monthly Income Plans (MIP) etc

 

MUTUAL FUNDS HOLDING PERIOD

The tax you need to pay on capital gains largely depends on the time for which you stay invested in the respective schemes. 

The following table gives a glimpse of holding period classification of mutual funds:

 Funds

Short-term

Long-term

Equity funds

Less than 12 months

12 months and more

Debt funds

Less than 36 months

36 months and more

 

Long Term Capital Gains

  • If you make a gain / profit on your investment in a Equity Mutual Fund schemethat you have held for over 1 year, it will be classified as Long Term Capital Gain.  Tax rate 10%

 

  • If you make a gain / profit on your investment in a Non-Equity Mutual Fund scheme (or in a Debt Fund) that you have held for over 3 years, it will be classified as Long Term Capital Gain. Tax rate 20% post indexation. Hence, investor will be taxed of gains over and above inflation-adjusted investment.

Short Term Capital Gains

  • If your holding in a Equity mutual fund scheme is less than 1 year i.e. if you withdraw your mutual fund units before 1 year, after making a profit, then the profit will be considered as Short Term Capital Gain. Tax rate 15%

 

  • If you make a gain / profit on your Debt fund (or other than equity oriented schemes)that you have held for less than 36 months (3 years), it will be treated as Short Term Capital Gain. Tax rate = slab rate applicable to investor

DIVIDENDS

  • Dividends from equity mutual funds are tax-free in the hands of investors. But dividends from equity mutual funds are paid after deducting a dividend distribution tax (DDT) of 11.648% (including surcharge and cess), which reduces the in-hand return for investors.

 

  • Dividends from debt mutual funds are tax-free in the hands of the investor but dividend payouts from debt mutual funds are subjected to a dividend distribution tax of 29.12% (including cess and surcharge). This effectively reduces the in-hand return for investors.

 

 SECURITIES TRANSACTION TAX (STT)

Mutual Funds also deduct Securities Transaction Tax (STT) on equity funds and hybrid equity funds (those with more than 65%) when you sell a mutual fund. This is deducted at a rate 0.001%. You do not have to pay it separately but it will reduce your returns to a small extent.

TDS ON MUTUAL FUNDS

There is no TDS (Tax Deducted at Source) on mutual fund capital gains or dividends, except for NRIs. However, dividends are paid to you after deducting Dividend Distribution Tax (DDT). The entire tax is deducted before paying you the dividend and hence the dividend is not taxable in your hands.

By

Maitri Badani

 

 

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