Income Tax efiling in India for FY 2023-24 (AY 2024-25)
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What is mutual fund taxation?
Profits/losses or gains from mutual funds assets are also taxable like many other asset classes you invest in. We know that taxes are hard to avoid, so it will be good to know about the tax on mutual funds. Majorly understanding mutual funds taxation can ease your planning for your investments to minimize your overall tax outgo. Today, we are to discuss how mutual fund taxation works, and by the last of this article, you’ll have a clear understanding of how mutual fund returns are taxed in India. let’s get started.
What Are The Essential Elements of Determining Taxation On Mutual Funds?
There are certain factors that are considered when it comes to levying tax on mutual funds. Below are the important factors that influence the taxes on mutual funds: The type of funds: Mutual funds are divided into two categories to ease the taxation: equity and debt-oriented mutual funds. The type of gains earned from mutual funds: Capital gains are the gains that you earn on selling an asset for a higher price than its original cost, and a dividend is a part of profits generated from the distribution of mutual fund company to the investors of the scheme (Dividends are not be sold by an investor to get the income of dividends). You can refer below for a detailed explanation of these and how each of these is taxed. Holding period: The holding period is simply a time of how long you hold the mutual funds or can say that the rate of tax you’ll pay on your capital gains depends on the holding period. The longer your holding duration, the lesser tax you will need to pay. Therefore, the investors are encouraged to hold the securities for a longer duration, which is why holding investments for longer periods minimize your tax liability.
How Do We Get Returns On Mutual Funds?
Mutual funds offer returns or profits to investors in two ways one is capital gains & dividend income. Capital gains are the profit that we get by selling an asset at a higher price than its original price of it. For example, if you have a unit of a mutual fund that you purchased for Rs.140, and you sold it when the price moves above Rs.140, you earn a profit on this. Dividends are another way of earning an income from mutual funds. The investors get the specified amount of income as dividends are paid out of the profits of the company if there are any. When the companies have surpassed cash, they may share it with investors as dividends. Investors acquire dividends proportionate to mutual fund units held by them. Investors are required to pay the tax while they receive dividends from the company. Taxation on Dividends by Mutual funds According to the amendments made in the Union Budget 2020, the dividends issued by the mutual fund schemes are taxed in a classical way. However, income from dividends offered by mutual funds was tax-free before the 31st of 2020. Dividends obtained by investors are added to their taxable income and taxed as per the income tax slab rates. Earlier, dividends were tax-free in the hands of investors as the companies paid dividend distribution tax (DDT) before sharing their profits with investors in the form of dividends. Any dividends more than Rs. 10 lacs per financial year draw the dividends distribution tax at 10%. Taxation on Capital gains by mutual fund The tax rate on capital gains offered by mutual funds are levied according to the holding period and its type. The holding period is basically a duration from the date of purchasing date and the selling date of assets. We have expressed a table below with the capital gains holding period to be treated as long-term & short-term. Type of Fund Long-term capital Gains Short-term Capital Gains Equity funds More than 12 months Shorter than 12 months Debt funds More than 36 months Shorter than 36 months longer Hybrid equity-oriented funds More than 12 months Shorter than 12 months longer Hybrid debt-oriented funds More than 36 months Shorter than 36 months Taxation of Capital Gains of Equity Funds. Equity mutual fund schemes involve investment in the equity (stocks) markets, whose portfolio’s equity exposure surpasses 65%. You get short-term capital gains when you redeem your equity fund units within one year holding duration. These gains are taxed at a flat rate of 15% regardless of the income tax bracket. These capital gains of up to Rs.1 lakh in a year would be tax-exempted. Any long-term capital gains surpassing this limit can fetch long-term capital gains taxed at the rate of 10%, without any benefit of indexation. Taxation of Capital Gains of Debt Funds A debt fund is a mutual fund that invests in fixed-income securities, such as Corporate and Government Bonds, corporate debt securities, and money markets that deliver capital appreciation. As mentioned above, you would get short-term capital gains for redeeming the debt fund units within the 3 years. And these gains are evaluated for taxation purposes. Taxation of Capital Gains of hybrid funds Moreover, long-term debt funds is believed when you sell debt fund units after the holding period of three years. These long-term capital gains are taxed at a flat rate of 20% along with the applicable surcharge & cess. The taxation is levied based on the portfolio capital gain of hybrid funds (Called balanced funds) and is dependent on the equity disclosure mentioned in the portfolio. In case the equity disclosure is more than 65%, then the fund is taxed like an equity fund, if not then taxation of debt funds applies. Fund Type Long-term capital gains Shorter-term capital Equity fund 15% + surcharge + cess Any gains above Rs.1 lakh are taxed at 10% + surcharge + cess. Up to Rs.1 lacs in a year is tax-exempt. Debt funds Taxed at income tax slab rate of investors 20% + surcharge + cess Hybrid equity-oriented funds. 15% + surcharge + cess Any gains above Rs.1 lakh are taxed at 10% + surcharge + cess. Up to Rs.1 lacs in a year is tax-exempt. Hybrid debt-oriented funds Taxed at the income tax slab rate of investors 20% + cess + surcharge
What is Securities Transaction Tax (STT)?
There is another tax named the Securities Transaction Tax (STT) apart from other types of taxes such as capital gains & dividends. The government (Ministry of Finance) levies an STT of 0.001% on the investors when they buy or sell mutual fund units of an equity fund/hybrid equity-oriented fund. However, there is no securities transaction tax for selling debt fund units.
Frequently asked questions
How do mutual funds give money?
Can I avoid capital gains tax?
When Do I need to pay the applicable to the mutual funds?
How long do I need to hold a mutual fund?
Does mutual fund returns are tax-free?
Are returns offered by mutual funds taxable?
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