How taxation works on Mutual Funds in India

How taxation works on mutual funds 1 How taxation works on Mutual Funds in IndiaWhile mutual funds are a great form of investment, it is noted that it comes under taxation. Before one invests in Mutual Funds, they need to understand how tax works for it in India. Income from mutual funds can either be in the form of a Regular dividend or the Sale of shares in funds, also known as a capital gain.

Taxation on Regular Dividends:

Dividends from the mutual funds were exempted from tax until March 2020 as the fund house used to pay Dividend Distribution Tax (DDT) of 28.84% for the mutual funds. However, since then, the tax liability lies on the investor, and they have to pay TDS at the rate of 10%.

Capital gain tax on mutual funds:

The profit earned on selling a share is known as capital gain, and taxation on it is called capital gain tax. The quantum of tax to be paid is decided based on the holding period and the type of mutual funds.  

The holding period is classified as short-term and long-term and varies with the type of mutual funds. The holding period is the time between buying the mutual fund and selling it. For Balanced and Equity Mutual funds, the holding period considered for short-term capital gain is less than 12 months, and if they are held for 12 or more months, it is regarded as a long-term capital gain. While for Debt mutual funds, the holding period for short-term capital gain is less than 36 months, and anything over that period is considered a long-term capital gain.

30 free trades How taxation works on Mutual Funds in India

  1. Taxation on Long-term capital gains
  • Tax saving equity funds

An investment made under ELSS (Equity Linked Savings Schemes) qualifies for tax exemption under section 80C. The maximum total savings under 80C that qualifies for exemption is Rs.1.5 lakhs.

If an investor has no other deduction in 80C, he/she can invest a maximum of Rs.1.5 lakhs in qualifying for tax exemption. If the investor is in the 20% tax bracket, he/she saves Rs.30000 tax.

If the investor claims Rs.50,000 exemption on payment of children’s school fees, PF, etc., he/she can invest Rs.1 lakhs in ELSS. The maximum permissible exemption under 80C is Rs.1.5 lakhs.

ELSS comes with a locking period of 3 years. The investor can’t redeem the units before three years.

Long Term Capital Gain (LTCG) Tax on redemption is exempted up to Rs.1 lakh. If LTCG is more than one lakhs, the applicable tax is 10% without indexation

  • Non-tax saving equity funds

Long Term Capital Gain (LTCG) Tax on redemption is exempted up to Rs. 1 lakh. If LTCG is more than 1 lakh, the applicable tax is 10% without indexation.

  • Balanced and Debt Mutual funds

Long-term capital gains on debt and balanced funds are taxed at 20% after indexation. (Indexation takes into consideration the inflation between the year of purchase of debts funds and the year of Sale of debt funds)

  1. Taxation on Short-term capital gains
  • Equity Mutual funds

Short-term capital gains on equity mutual funds are taxed @ 15% with a cess of 4%, totaling it to 15.6%

  • Debt Mutual funds

Short-term capital gains (< 36 months) on debts funds are added to your income and taxed as per the applicable slab your income falls under (5% or 20% or 30%)

  • Balance Mutual funds

They are an equity-oriented fund that invests 65% (minimum) of assets inequities. These are taxed as “Non-tax savings equity funds.”

  • Systematic Investment Plan (SIP)

Each investment is considered a new venture, and capital gains are taxed accordingly.

While it is essential to know how tax works for mutual funds, it is recommended to consult a professional Chartered Accountant before you file tax returns on it. Also, we at Tradeplus can help you buy and sell mutual funds. We charge one of the lowest brokerage fees at either Rs 9 or 0.01%, whichever is lower. Further, if you are a regular investor in Mutual funds, you can choose our flat pricing fee plan that lets you make unlimited trades. 

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