Benjamin Franklin once said, “there is nothing certain in this world, except death and taxes.” Your financial planning mostly revolves around investing and growing your money through consistent savings in better performing investments. However, most of us choose to ignore the tax impact of such returns. However, taking care of the tax laws and evaluating the investment on their post-tax returns is a much rational way to select your preferred investments. This article will attempt to explain the taxation principles surrounding your mutual fund investments.
Point of Taxation
While you may be seeing your mutual fund portfolio growing steadily, you do not attract any tax liability until you choose to redeem your mutual fund investments. As such, the point of taxation for your returns from mutual funds is the date of redemption of the mutual fund units.
The categorisation of Mutual Funds for Tax Purposes
Tax laws categorize all the mutual fund schemes into two categories:
Equity-oriented Mutual Funds – Equity oriented mutual funds are those mutual fund schemes where a minimum of 65% of the portfolio is invested in equity shares of domestic companies listed on a recognized stock exchange.
Other than Equity Oriented Mutual Funds
Long Term and Short Term Capital Gains
Tax laws further categorize your gains from mutual fund investments into two categories:
Short Term Capital Gains (STCG) – As the name suggests, it refers to the gains accrued from mutual fund investments held for a relatively shorter time period. This period is less than 12 months in case of equity oriented mutual funds and less than 36 months in case of all other mutual fund schemes including gold funds, debt funds etc.
Long-Term Capital Gains (LTCG) – It refers to the gains accrued from mutual fund investments held for 12 months or more in case of equity oriented mutual funds and 36 months or more in case of all other mutual fund schemes including gold funds, debt funds etc.
Tax Liability arising from Mutual Funds
Here is the brief summary of taxation of returns from mutual funds:
|Type of Mutual Fund
|Equity-oriented Mutual Funds
||10% without indexation
|Other than equity oriented mutual funds
||Normal tax rates applicable
||10% with indexation or 20% without indexation, whichever is lower
The tax provisions governing the gains from MF schemes are detailed hereunder:
Gains from Equity Oriented Mutual Funds – Short-term capital gains from equity oriented mutual funds are taxed @ 15%. With respect to long-term capital gains from such schemes, such gains were exempt from tax in the hands of the investor till the financial year 2017-18. However, Union Budget 2018 introduced LTCG tax on gains from equity shares and equity oriented mutual funds. As per the present provisions, income tax @ 10% shall be payable on such long-term capital gains without any indexation benefit. Further, such income tax will be payable only for gains exceeding Rs. 1 lakh.
Gains from Other Mutual Funds – Short-term capital gains from other mutual funds like debt funds etc. are taxed at normal tax rates, as applicable to the investor. With respect to long-term capital gains, such gains are taxed at lower of 20% without indexation benefit or 10% with indexation benefit.
Taxation of Dividend Received from Mutual Funds
In terms of taxation of dividends received from mutual funds, the taxability in the hands of investor remains the same and as such, the dividends remain exempt in the hands of investors. However, the mutual fund houses are liable for paying dividend distribution tax on such distributed dividend at specified rates.
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