There is a saying that “The Only Two Certainties In Life Are Death And Taxes”
The knowledge of Taxation in your area of operation or business is of prime importance in the journey towards financial freedom. Having the right knowledge will help to plan your finances properly, maximize your savings and keep away the intrusion of Tax Man in your business.
We have discussed the basics of taxation in our country and in detail about Taxation in the Stock Market in the article Link….. Taxation on Mutual funds is slightly different from that on the Stock Market. We know that Mutual Funds are not necessarily equity-linked products, they can be Debt instruments or any fixed income instruments or a combination of equity and debt instruments products as well. The Taxation in a Mutual Fund depends mainly on the type of Mutual Fund as per the asset classes included in its portfolio, i.e. whether the fund is Equity oriented or Debt oriented. You can read in detail about Mutual Funds, Key Terms, Various types of Mutual Funds, etc on our article Link…..
Since Mutual Funds being an investment option through which an investor aims for capital appreciation on a short or long period of investment, thus the returns generated through the same falls under the head of Capital Gains as per Income Tax Act 1961. Capital Gains can be of two categories, Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). Capital Gains Taxation on Equity oriented Mutual Funds and Debt oriented mutual funds are different, as the period of investment to decide whether the investment is Short Term or Long Term is set to be different.
Let’s have a quick look at the capital gains Taxation on Equity Oriented Mutual Funds and Debt oriented Mutual Funds…
Tax on Equity Funds and Debt Funds
If a Mutual Fund Product allocates 65% or more of the investor money in Equity Instruments, i.e. in Shares of listed domestic companies, then such types of Mutual Funds come under the category Equity Mutual Funds or Equity Funds or Equity oriented Mutual Funds.
If the Mutual Fund Product allocates 65% or more of the investor money in Debt Instruments (Like Bonds, Debentures, FD, T-Bills, etc), then such types of Mutual Fund Products come under the category of Debt Mutual Funds or Debt Funds or Debt Oriented Mutual Funds.
Hybrid Mutual Funds give the investor an opportunity to invest in Equity and Debt instruments to reap the benefits of both instruments. A Hybrid Mutual Fund will be considered as Equity oriented only if 65% or more of the investment amount is allocated to Equity instruments.
Holding Period to Determine Short Term and Long Term Capital Assets
The holding period of an asset is the factor that decides whether the gains generated from the asset are to be treated as STCG or LTCG. For Equity Instruments, if the holding period of the shares of a company or Equity Mutual Funds is more than 12 months, then it will be considered as Long Term Capital Assets, and the gains generated while selling it after 12 months will be considered as Long Term Capital Gains. If the Holding Period is less than or equal to 12 months, then it will be treated as Short Term Capital Assets.
For Debt instruments, if the holding period is more than 36 months then it will be considered as Long Term Capital Assets and gains generated on selling the same after 36 months will be treated as Long Term Capital Gains. If the Holding Period is less than or equal to 36 months, it will be treated as Short Term Capital Assets.
Taxation on Equity Oriented Funds
Short Term Capital Gains on Equity Shares or Equity Oriented Mutual Funds are taxed at a 15% rate if Securities Transaction Tax is paid while selling the asset.
Long Term Capital Gains on Equity Shares or Equity Oriented Mutual Funds above 100,000/- are taxed at a 10% rate, if securities Transaction Tax is paid during the trade of such assets.
Taxation on Non-Equity Oriented Funds
Short Term Capital Gains on Non-Equity Oriented Mutual Funds are taxed as per the tax slab rate to which the Taxpayer fits into.
Long Term Capital Gains on Non-Equity Oriented Funds are liable for 10% tax if gains are computed without indexation Benefit or 20% tax if the gains are computed with indexation benefit, whichever is more beneficial to the Taxpayer.
****One thing to understand here is that you have to pay the taxes only if you are selling the funds and booking profits. otherwise, while holding the fund, showing all your investments while filing ITR is a must.
Taxation on Mutual Fund Dividends
In addition to Capital Gains, dividends are paid or reinvested by certain types of mutual funds and in such cases, if the dividend amount is above Rs.5000/-, Tax Deducted at Source TDS at a 10% rate is applied on the same.
A resident individual whose annual income is less than the basic exemption limit, then he should file form 15G or 15H to the Mutual Fund house to claim dividends without TDS.
How to save tax on mutual funds returns?
An ELSS or equity-linked savings scheme is a tax-saving investment option under Section 80C of the Income Tax Act, 1961. ELSS funds are equity-oriented, and at least 65% of their portfolio consists of equity-linked securities. The debt and money market instruments form the remaining part of the portfolio.
You will get a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. a. ELSS funds are the only tax-saving funds within the Rs 1.5 lakh limit which has the additional advantage of giving equity-linked returns.
Click here to know more about taxation in the stock market.