Investing in mutual funds is a popular choice among Indian investors due to ease of investment and out sourcing the fund management. However, understanding the tax implications of mutual fund investments is crucial for maximizing benefits and avoiding surprises at tax time. This blog will explain the tax rules for mutual funds in India, including key terms and income tax concepts for mutual fund, mutual fund tax, mutual fund taxation, mf taxation, and mutual fund taxability.
Types of Mutual Funds and Their Tax Implications
| Type of Mutual Fund | Holding Period on STCG | Holding Period on 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 |
| Hybrid Fund-Equity Oriented | Less Than 12 Months | More Than 12 Months |
| Hybrid Fund-Debt Oriented (Until 31st March 2023) | Less Than 36 Months | More Than 36 Months |
1. Equity Mutual Funds
Equity mutual funds invest primarily in stocks. The tax treatment for these funds depends on the holding period.
- Short-term Capital Gains (STCG): If you sell your equity mutual fund units within one year, the gains are considered short-term, and tax for mutual fund is charged at 15%.
Suppose you invest ₹1,00,000 in an equity mutual fund and sell it after six months for ₹1,20,000. Your short-term capital gain is ₹20,000, and you will be paying tax for mutual fund at 15% of this gain, amounting to ₹3,000.
- Long-term Capital Gains (LTCG): The gains are considered long-term if you hold your equity mutual fund units for over a year. As per current rules, LTCG above ₹1 lakh in a financial year is tax for mutual fund will be at 10% without indexation benefit.
For example, if you invest ₹1,00,000 in an equity mutual fund and sell it after two years for ₹1,50,000. Your long-term capital gain is ₹50,000. Since the gain is less than ₹1 lakh, it is not taxable. However, if the gain were ₹1,20,000, the taxable amount would be ₹20,000, and you would pay a 10% tax on this amount, totaling ₹2,000.
2. Debt Mutual Funds
Debt mutual funds invest in fixed-income securities like bonds and treasury bills. The tax treatment for these funds also depends on the holding period.
- Short-term Capital Gains (STCG): If you sell your debt mutual fund units within three years, the gains are considered short-term and taxed per your income tax slab.
Long-term Capital Gains (LTCG): If you hold your debt mutual fund units for more than three years, the gains are considered long-term and taxed at 20% with the benefit of indexation.
3. Hybrid Mutual Funds
Hybrid mutual funds invest in a mix of equity and debt instruments. The tax treatment depends on the fund’s composition .
- If the fund has more than 65% of its assets in equity, it is treated as an equity mutual fund for tax purposes.
- If the fund has less than 65% of its assets in equity, it is treated as a debt mutual fund for tax purposes.
Dividend Distribution Tax (DDT) and Its Abolition
Earlier, mutual funds were subject to Dividend Distribution Tax (DDT), which the fund houses deducted before distributing dividends to investors. However, the Union Budget 2020 abolished DDT, and now dividends are taxable for investors as per their income tax slab. This change emphasizes the importance of considering the tax implications of dividends when choosing mutual funds.
Tax Deducted at Source (TDS) on Mutual Funds
As per the new rules introduced in the Finance Act 2020, mutual fund houses must deduct TDS at the rate of 10% on dividend income exceeding ₹5,000 in a financial year. However, there is no TDS on capital gains from mutual fund redemptions.
Tax Saving Mutual Funds: ELSS
Equity Linked Savings Scheme (ELSS) is a mutual fund offering tax benefits under Section 80C of the Income Tax Act. Investments in ELSS are eligible for a deduction of up to ₹1.5 lakh in a financial year. However, ELSS funds come with a mandatory lock-in period of three years, and the LTCG tax for mutual fund rules for equity funds apply to gains from ELSS.
For example, if you invest ₹1,50,000 in an ELSS fund, you can claim the entire amount as a deduction under Section 80C, reducing your tax for mutual fund by ₹1,50,000. If you sell the ELSS units after three years for ₹2,00,000, the LTCG on ₹50,000 would be subject to a 10% tax if your total LTCG exceeds ₹1 lakh in that financial year.
How to Report Mutual Fund Taxes
When filing your income tax returns, you must report your mutual fund transactions under the capital gains section. The fund houses provide a Consolidated Account Statement (CAS) that summarizes your transactions and helps calculate the gains or losses. Ensure to report both short-term and long-term capital gains separately and pay the applicable tax for mutual fund.
Conclusion
Understanding mutual fund taxation is essential for making informed investment decisions and optimizing your returns. Whether it’s the tax for mutual funds, mutual fund tax, or MF taxation, knowing the rules can help you plan your investments better. You can make the process easier with stock portfolio management services, as they can give you investment advise.
By staying informed about the tax for mutual fund, you can make smarter choices and enhance your investment strategy for tax harvesting in the dynamic Indian financial landscape. You can also read what is professional tax with our other blog.
*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.
FAQs
How are Mutual Funds Taxed?
Mutual funds in India are taxed based on the type of fund and the holding period:
Equity Mutual Funds:
Short-term Capital Gains (STCG): Gains from units held for less than one year are taxed at 15%.
Long-term Capital Gains (LTCG): Tax for mutual fund gains from units held for more than one year is at 10% for amounts exceeding ₹1 lakh in a financial year without indexation benefits.
Debt Mutual Funds:
Short-term Capital Gains (STCG): Tax for mutual fund gains from units held for less than three years are according to the investor’s income tax slab.
Long-term Capital Gains (LTCG): Tax for mutual fund gains from units held for more than three years are at 20% with indexation benefits.
Hybrid Mutual Funds: Tax for mutual fund Taxation depends on the fund’s asset allocation:
If equity allocation is more than 65%, tax for mutual fund is like an equity fund.
If equity allocation is less than 65%, tax for mutual fund is like a debt fund.How to Calculate Tax on Mutual Fund Redemption?
To calculate the tax on mutual fund redemption,first calculate income tax on salary, and follow these steps:
Determine the Type of Fund: Identify whether the mutual fund is an equity or debt fund.
Identify the Holding Period: Check the duration for which the mutual fund units were held.
Calculate Capital Gains:
Short-term Capital Gains (STCG): Subtract the purchase price from the sale price if the holding period is less than one year for equity funds or less than three years for debt funds.
Long-term Capital Gains (LTCG): Subtract the purchase price from the sale price if the holding period is more than one year for equity funds or more than three years for debt funds. For debt funds, use the indexed cost of acquisition.
Apply the Tax Rate:
For equity funds: 15% for STCG and 10% for LTCG (above ₹1 lakh).
For debt funds: As per income tax slab for STCG and 20% with indexation for LTCG.What is a Tax Saver Mutual Fund?
A tax saver mutual fund, also known as an Equity Linked Savings Scheme (ELSS), is a type of mutual fund that offers tax benefits under Section 80C of the Income Tax Act, 1961. Here are the key features:
Tax Benefits: Investments in ELSS are eligible for a tax deduction of up to ₹1.5 lakh in a financial year under Section 80C.
Lock-in Period: ELSS funds have a mandatory lock-in period of three years, which means you cannot redeem your investment before three years.
Equity Exposure: ELSS funds primarily invest in equities, which can provide higher returns and tax benefits.
I’m Archana R. Chettiar, an experienced content creator with
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