Business Team

MUTUAL FUND TAXATION – HOW MUTUAL FUNDS ARE TAXED?

Usually, individuals who invest in mutual funds make profits on the capital invested via dividend recipients and capital appreciation. Mutual funds have great potential to offer capital gains. Capital gains are the difference between the investment’s purchase price and the sale value. While capital gains are taxable at the hands of investors, the dividend options of mutual funds – Dividend Distribution Tax (DDT) is paid by the fund house or the AMC (Asset Management Company) on behalf of the investors.This article is a quick guide for taxation on mutual fund investments, for both equity funds and debt funds.

The period for which the investors stay invested in mutual funds is called the holding period. A holding period plays a major role in determining the tax implications on your mutual fund investments.

Types of holding period

Different types of mutual funds have different criteria for what constitutes a long-term horizon and a short-term horizon.

  • Long-term holding period – For equity mutual funds, the investment is considered as long term if the duration is equal to or more than 12 months. In case of debt mutual funds, a holding period of 36 months or more is considered as long term.
  • Short-term holding period – Equity investments held for less than 12 months are regarded as short-term. Debt funds are considered short-term if the investment is held for less than 36 months.

Hybrid funds, having an exposure of more than 65% or more are taxed like equity mutual funds. If the equity exposure is equal to less than 65% or is equally exposed to debt and equity instruments, i.e. 50% debt and 50% equity, it is treated as debt for taxation.

Taxation on mutual funds

  • Equity mutual funds – Short term capital gains tax (STGC) in equity funds are taxed at the rate of 15% plus 4% cess. Long term capital gains tax (LTCG) in equity funds is taxed at 10% without the benefit of indexation* provided the capital gains in a financial year is over Rs 1 Lakh. Long term capital gains upto Rs 1 Lakh is entirely tax-free.
  • Debt mutual funds – Long-term capital gains on debt fund are taxable at the rate of 20% with the benefit of indexation. Short-term capital gains on debt mutual funds are taxed as the income tax slab of the investor.

*Indexation is a technique of factoring inflation from the time of purchase to sale of units.Itpermits inflating the purchase price of debt mutual funds to bring down the value of capital gains.

As an investor, it is imperative to consider the tax implication on your investments as taxes can eat a majority of your returns. So choose the right mutual fund for your portfolio by analysing your goals, risk appetite, and investment horizon and tax implications. Happy investing!

Comments are closed.