Mutual fund have become more popular with every passing day due to increased awareness among the public. The potential of return in comparison to traditional tools makes it more attractive. Investing in mutual funds is a great idea but knowing taxation is equally important. We will go into the taxation implications of mutual funds in India in this thorough blog, concentrating on how gains are taxed for different types of mutual funds.
Types of Mutual Fund in India
Before we go into taxation, let’s have a look at the many types of mutual funds accessible in India:
A. Equity Funds
These funds primarily invest in corporate stocks. They are considered high-risk, high-reward investments that qualify for preferential tax treatment if held for a lengthy period of time.
B. Debt Funds
Debt funds invest in fixed-income securities such as government bonds, corporate bonds, and so on. They have a lower risk profile than equities funds.
C. Hybrid Funds
Hybrid funds invest in a mix of equities and debt instruments with the goal of providing a good mix of risk and return.
What factors affect the Mutual Fund Taxation?
Mutual fund taxes in India are determined by below factors:
A. Holding Period
The longer the holding period, the less taxes. Holding period is the time between purchase and sale of mutual funds. We will show a chart below which shows holding periods on different categories of mutual fund. Holding period determines whether gain is short term or long term.
B. Type of Mutual Fund
The fund’s classification as equity-oriented or non-equity-oriented.
C. Capital Gain
When you sell your mutual funds, you make capital gain or capital loss.
D. Dividend
You do not have to sell assets to receive dividends. Dividend is the portion of accumulated profits that is distributed to the investors.
Taxation of Equity-Oriented Mutual Fund
Equity-oriented mutual funds have at least 65% of their assets invested in equities. Equity funds, equity-oriented hybrid funds, and arbitrage funds are some examples.
An equity oriented mutual fund becomes long term if you hold it for more than 12 months. Long term capital gains are taxed at 10%, long term capital gain upto 1 lakh is exempt from taxes on equity oriented mutual funds. No indexation benefit is available on long term capital gain on mutual funds.
For example, if you make 120000 long term capital gain on sale, the first 100000 is exempt from tax and balance 20000 is taxed at 10% (plus cess & surcharge as applicable) regardless of your income tax slab.
If you held a mutual fund for less than 12 months, gain is short term capital gain. It is taxed at a flat rate of 15% (plus cess & surcharge as applicable) regardless of your income tax slab. Capital gain exemption of 1 lakh is not available on short term gain.
For example, if you make 120000 short term capital gain on sale, you will be taxed on 120000 at the first 100000 is exempt from tax and balance 20000 is taxed at 15% (plus cess & surcharge as applicable) regardless of your income tax slab.
Systematic Investment Plan (SIP) Taxation
For SIP investments, each installment is treated as a distinct investment and is taxed based on the holding term.
Tax on Equity linked Saving scheme Mutual Fund (ELSS)
ELSS comes with a three year lock in period therefore always resulting in long term capital gain. Section 80C of the Income Tax Act provides tax incentives for equity-linked savings schemes (ELSS). Investments in ELSS up to INR 1,50,000 in a fiscal year are tax deductible, subject to the overall Section 80C limit.
Taxation of Dividends
Dividends from mutual funds were previously tax-free in the hands of the investor. Dividends from mutual funds are subject to tds. The AMC deducts 10% TDS under section 194K , TDS is supposed to be deducted if payment of dividend exceeds 5000. You can claim this TDS at the time of ITR filing.
Holding period on different types of mutual fund
| Type of Mutual Funds | Holding period for STCG | Holding period for LTCG |
| Equity funds | Less than 12 months | More than 12 months |
| Debt Funds (Until 31st March 2023) | Less than 36 months | More than 36 months |
| Debt Funds (Until 31st March 2023) | Less than 12 months | More than 12 months |
| Hybrid Fund-Debt Oriented (Until 31st March 2023) | Less than 36 months | More than 36 months |
Conclusion
Understanding mutual fund taxes is critical for making sound investment decisions and reaching long-term financial objectives. The tax consequences differ depending on the holding period and the type of mutual fund. To maximize your profits as an investor, you must link your investment strategy with your tax planning. Before making any investment decisions, it is best to speak with a certified tax expert for individualized advice geared to your specific financial situation. Tax Vic has best investment advisor partners who can make your financial lives safe and the best. Connect with our expert reetu@taxvic.com to know more.
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