Taxation on Mutual Funds : Learn It All Here

In this materialistic competitive world today, everyone tries to make more money and from as many available sources as possible. But as it is said that nothing good comes easy so is the case with theseearnings. As you earn more, the tax follows you. When there are different sources of earning money, you need to know how much and on what you are asked to pay tax. Mutual funds from the last decade have been much preferredarea of investing money and a great earning source. The number of mutual fund investors is remarkably increasing but ironically, at the same time, there are lots of questions and doubts that still have made a home in people’s minds. This article addresses one of such major questions, the taxation on mutual funds.

 

Yes, earnings on mutual funds are taxable. To understand whether one has to pay tax on investing in mutual funds and how much one needs to pay, you first need to be aware of the two types of mutual funds, the two different term periods, and the two different income ways in mutual funds.

 

Types of Mutual Funds

Taxation on mutual funds is based on two different types of mutual funds.

1. Equity Mutual Funds

These are the schemes which invest 65% of its assets in shares of Indian Listed companies.

2. Non-equity Mutual Funds 

These are all the schemes which do not fall under the equity mutual fund category. These include Debt Funds, International Fund of Funds, Gold Funds, Monthly Income Plans, etc.

 

One can earn through mutual funds in the two forms, namely, capital gains and dividends.

 

Capital Gains

Capital gain is the difference between the purchase value and the selling value. In simple words, it is the profit gained from sale of the investment. Suppose, you invested Rs. 10,000 in mutual funds and you sold these units at Rs. 12,000, then Rs. 2,000 is your capital gain. You have to pay tax on this gain of Rs. 2000.

 

Dividends

Dividend is the income received periodically until the investor holds his mutual funds for a specific period of time.

 

Now, the amount that you have to pay will depend on the holding period for which you have invested your money. This will be either short term or long term. It also depends on the type of mutual fund you have invested in.

 

Short term holding period

Equity funds : a period less than 12 months

Non-equity funds : a period less than 36 months

 

Long term holding period

Equity funds :a period of 12 months or more

Non-equity funds :a period of 36 months or more

 

Having understood these terminologies, now, let’s understand how tax is calculated on mutual fund earnings.

 

Taxation on Capital Gainson Equity Funds for Short-term Holding Period

If you sell your mutual fund within a period of 12 months, you need to pay 15% tax on capital gains. For example, if a person invests Rs. 1,00,000 in equity mutual fund and sells it in the 10^th month, say for Rs. 1,05,000, the appreciated value is Rs. 5000 and so he will have to pay a tax amount of Rs. 750 on this capital gain.

 

Taxation on Capital Gains on Equity Funds for Long-term Holding Period

If a person holds his mutual funds for 12 months, he needs not to pay any tax at all. For example, if a person invests Rs. 10,000 in equity mutual funds and holds it for 12 months, whose value becomes say, Rs. 13,000, he does not need to pay any tax on this appreciated amount. This is the reason why people are more interested in equity mutual funds for long term.

 

However, from the 2018 budget, if this amount is more than Rs. 1,00,000, then a tax of 10% will be applicable on the appreciated amount. Any Capital Gain accrued till 31^stJanuary, 2018 has been grandfathered, i.e., it will not be taxable.

 

Taxation on Capital Gains on Non-equity Funds for Short-term Holding Period

If a person sells his debt mutual funds within a period of 36 months, the income generated out of it will be taxable. The amount of tax will be according to the income tax slab of the person.

 

Taxation on Capital Gains on Non-equity Funds for Long-term Holding Period

The tax in this case will depend whether indexation to be used or not.

Indexation reduces your tax rate to adjust for inflation. The amount of tax is reduced after factoring the Cost Inflation Index published by the Income Tax Department every year.

If indexation benefit is used, 20.8% tax on his capital gains will be levied.

Without the indexation benefit, a 10% tax on capital gains will be applied.

 

Taxation on Dividends on Equity Funds

Dividends earned from equity funds are tax-free. But these dividends are paid after deducting a Dividend Distribution Tax(DDT) of 11.648% (including surcharge and cess). So, finally it is as equal as paying tax.

 

Taxation on Dividends on Non-equity Funds

Dividends earned from non-equity funds are also tax-free. However, a Dividend Distribution Tax of 29.12% (including surcharge and cess) is applied on the return. This reduces the in-hand return for the investor.

 

Taxation on Mutual Funds for NRIs

The tax percentage on equity and non-equity mutual funds,for both short and long period is charged differently for NRIs. For short term holding period in equity funds, 15% tax rate is applicable while for long term equity funds, 10% is applicable.

In case of non-equity funds, tax rate is applicable as per the individual’s income tax slab for short term holding period and for long term holding period on non-equity funds, 20% tax rate is levied.

Taxation on dividends for NRIs on both the equity funds and non-equity funds is same as that for Indian resident.

 

Taxation on SIPs

SIP or the Systematic Investment Plan is where you invest your money not all at a time but in installments. If you wish to redeem your SIP after completion of one year, only the first installment will actually be considered in long term capital gain while the other installments will be considered in short term capital gains since these other installments have not completed 12 months.

For example, if you start your SIP in the month of March 2019, you will invest your money each month from March 2019 to February 2020.If you would redeem your SIP on 5March 2020, then only your first installment of March 2019 would have completed while that of April or May or any other month would be considered as short period (less than 12 months for equity funds). The first installment considered as LTCG will be tax free and taxed at 10% if amount more than Rs. 1 lakhs while the others considered as STCGwill be taxed at 15%.

Taxation on SIP for non-equity mutual funds for long term holding period is 20.8% after indexation benefit while that for short term period is as per the individual’s tax slab.

 

Securities Transaction Tax

It must be noted that irrespective of the holding period, 0.001% of Securities Transaction Tax (STT) is levied by the fund company on redemption of equity mutual funds. However, there is no STT on non-equity mutual funds.

 

Tax Deduction at Source

There is no TDS cut on either equity or non-equity mutual funds. However, for NRIs TDS is applicable for both types of mutual funds.

On equity funds for short term duration, 15% tax is levied on capital gains while 10% for long term holding period.

30% tax is applicable on capital gains of non-equity funds for short term duration while for long term duration, 10% for listed and 20% for non-listed is applicable.

 

 

It is very much clear from this article that mutual funds hold for long term yield good results as the tax applicable is much lesser relative to short term duration. Still, if you have any doubts left regarding taxation on mutual funds, do ask in the comments section below and our experts will be there to clarify them.