It has always been the point of discussion while deciding the eligibility of investment made in Mutual funds for claiming deduction under Sec 80C of the Income Tax Act and also to calculate its taxability at the time of redemption. It should be noted that taxation of Mutual fund depend upon its type whether it is equity oriented fund or Debt oriented fund.
Further, just by making investment in equity oriented mutual fund or equity related instruments don’t allow the investor to claim benefit under sec 80C of the Income Tax.
Under the current scenario, only the investment made in accordance with Equity linked Saving Scheme, 2005 (ELSS Scheme) notified by the Ministry of Finance is eligible for investment under Sec 80C of the Income Tax subject to the ceiling limit of Rs.1,50,000.
As per SEBI guidelines on Categorization and Rationalization of schemes issued in October 2017, mutual fund schemes are classified as –
EQUITY SCHEME
Under this, investments are primarily made in
- Equities and equity related instruments.
- Under Equity category, there are also further category of Large Cap, Mid cap & Small Cap stock. Further, this category is assigned on the basis of market Capitalization of companies. (Market capitalization= Current price per share * No of outstanding shares)
Table 1.0
|
Particulars |
Large Cap Stock |
Mid cap Stock |
Small Cap Stock |
|
1. Nature |
Investment made in companies that are well established and have a significant market share. |
Investment made in companies that have the ability to turn into large cap companies and tend to be more volatile |
Investment made in companies that are relatively smaller in size and have significant growth potential. |
|
2. Market Capitalization |
It has market caps of Rs. 20,000 crore or more. >=Rs. 20,000 crore |
It has market caps of more than Rs. 5000 crore but upto Rs. 20,000 crore 5000 crore<=20,000 crore |
It has market caps of less than Rs. 5000 crore <= 5,000 crore |
|
3. Risk |
Low risk |
Medium Risk |
Higher risk |
|
4. Returns |
Returns are relatively lower than mid cap and small cap. |
Higher returns |
Significant returns |
CATEGORY OF EQUITY ORIENTED FUND
Table- 2.0
|
Particulars |
Large, small & mid cap fund |
Dividend yield Fund |
Value fund |
Sectoral Fund |
ELSS scheme |
|
1. Nature |
Large- 80% investment made in large cap stock Mid- 65% investment in mid cap stock Small 65% investment in small cap stock (refer above table 1.0) |
Invest in dividend yielding stock with at least 65% in stock |
Investment made in fund that are currently undervalued but are expected to perform better in long run |
Investment in a particular sector of the economy such as infrastructure, banking, technology etc |
Invests at least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance. Lock in period of 3 years |
|
2.Eligibility u/s 80C |
Not eligible for deduction u/s 80C |
Not eligible for deduction u/s 80C |
Not eligible for deduction u/s 80C |
Not eligible for deduction u/s 80C |
Eligible subject to ceiling limit of Rs. 1.50 lacs |
|
3. Taxbility on redemption |
Taxable under Capital gain |
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4. Period of holding |
LTCG- If period of holding is 12 months or more. STCG- If period of holding is less than 12 months |
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5. taxability of LTCG/ STCG |
LTCG-Where Long term capital gain exceed Rs. 1,00,000 then it is taxable @ 10% u/s 112A. STCG-Short term capital gain taxable @ 15% u/s 111A. |
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DEBT FUND
A debt fund (also known as income fund) is a fund that invests primarily in bonds or other debt securities.Debt funds invest in short and long-term securities issued by government, public financial institutions, companies, Treasury bills, Government Securities, Debentures, Commercial paper, Certificates of Deposit and others.
Debt funds can be categorized based on the tenor of the securities held in the portfolio and/or on the basis of the issuers of the securities or their fund management strategies, such as
- Short-term funds, Medium-term funds, Long-term funds
- Gilt fund, Treasury fund, Corporate bond fund, Infrastructure debt fund
Generally, the Debt oriented Mutual funds are those fund where the investments of the proceeds is made as follows:
- Equity = not more than 35%
- Debt= 65% or in excess of 65%
Taxability Of Debt Fund (Till AY 2023-24)
For F.Y. 2022-23, taxability of debt fund is done according the period of holding which is tabulated below:
|
Particulars |
Short Term |
Long term |
|
1. Period of holding |
Not more than 36 month will be treated as STCG |
36 months or more |
|
2. Taxation |
Taxable at slab rate |
Taxable @ 20% after indexation |
Taxability Of Debt Fund (from AY 2024-25)
For F.Y. 2023-24, taxability of Specified Mutual Fund (Debt fund) where not more than 35% of the proceeds are invested in the equity shares.
Taxability of Debt Fund
Debt Oriented Mutual fund issued on or after 01.04.2023 will now be treated as Short term and taxable at slab rate irrespective of period of holding.
|
Particulars |
Long term Debt fund |
Short Term dent fund |
|
Treatment |
Treated as Short term, no indexation benefit. |
|
|
Taxability |
Taxable at slab rate |
|
HYBRID FUND
Hybrid fund are a mix of equity and Debt securities.
Equity oriented hybrid funds (Aggressive Hybrid Funds) are ideal for investors looking for growth in their investment with some stability. If the equity exposure exceeds 65% , then it is taxed like an equity fund.
Taxation
- STCG- 15%
- LTCG- Any gain exceeding Rs. 1 lakh taxed @ 10%
Debt-oriented hybrid funds (Conservative Hybrid Fund) are suitable for conservative investors looking for a boost in returns with a small exposure to equity. If the equity exposure is less than 65%, then it will be taxed like an Dent fund.
Taxability-Treated as short-term gain and taxable at slab rate.
Conclusion
Hence, understanding the category of mutual fund enables the taxpayer to determine tax liability accurately in accordance with the provisions of the Income Tax act.
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