13 December 2019
Hello, If i invest in mutual fund & mutual fund in turns invests with the pool of money.Now for suppose, mutualfund co sold shares and got the capital gains which will be distributed to unit holders. How is this capital gains taxed in the hands of unit holders.Now if i sold the units of mutual fund and earn the gain, hoe is this gain taxed? How the dividend distributed by the co in which mutual fund invested & mutual fund taxed?
30 May 2020
Taxation on Mutual Funds a. Equity Equity Funds Both tax-saver and regular equity funds are considered the same for taxation. LTCG tax is applicable on equity funds at the rate of 10% if the capital gains exceed Rs 1 lakh a year, and there is no benefit of indexation. However, ELSS funds differ from the regular funds when it comes to the lock-in period. While most regular equity funds do not have a lock-in period, ELSS funds come with a lock-in period of three years. Meaning, the redemption of ELSS mutual funds can be made only at the end of the lock-in period.
Note: The limit of 1 lakh is cumulative of capital gains on all equity instruments such as stocks and equity mutual funds.
b. Debt Funds Long-term capital gains on debt fund are taxable at the rate of 20% after indexation. Indexation is a method of factoring inflation from the time of purchase to sale of units. Indexation allows inflating the purchase price of debt funds to bring down the quantum of capital gains. You are required to add short-term gains from debt funds to your overall income. They are subject to short-term capital gains tax (SCGT) and is taxable as per the income tax slab you fall under.
c. Balanced Funds Balanced funds are taxable depending on their equity exposure. Hybrid equity-oriented funds are taxed as any other equity fund while hybrid debt-oriented funds are taxed as any other debt fund.
d. SIPs Systematic investment plans (SIP) are a method of investing in mutual funds. They are designed such that investors can invest a small sum periodically. Investors are given the complete liberty to choose the frequency of their investment. It can be weekly, monthly, quarterly, bi-annually, or annually. The taxation of mutual funds depends on the mode of investment.
The taxation of SIP investment is done on a pro-rata basis. Each SIP, treated as a new investment, attracts taxes on its gains separately.
For instance, you initiate a SIP of Rs 10,000 a month in an equity fund for 12 months. Each SIP is considered to be new investment. Hence, after 12 months, if you decide to redeem your entire accumulated corpus (investments plus gains), all your gains will not be tax-free. Only the gains earned on the first SIP would be tax-free because only that investment would have completed one year. The rest of the gains would be subject to short-term capital gains tax.
e. Securities Transaction Tax (STT) Apart from these, there is another type of tax called the Securities Transaction Tax (STT). An STT of 0.001% is levied by the government (Ministry of Finance) when you decide to sell your units of an equity fund or a hybrid equity-oriented fund. There is no STT on the sale of debt fund units.
Conclusion: The longer you hold onto your mutual fund units, the more tax-efficient they become. The tax on long-term gains is comparatively lower than that of the tax on short-term gains.
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