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How are Mutual Fund Returns Taxed in India?
Taxes offered on mutual fund investment primarily depend on the type of fund, investment duration, and income tax slab an investor falls under.
Income from mutual funds is also included in taxable income. Dividends are taxed as per the applicable tax slabs, too.
Individuals willing to learn about mutual fund taxation and invest accordingly must read the following sections to make an informed investment decision.
Table of Contents
How Investors Can Earn by Investing in Mutual Funds?
When investors invest money in mutual funds, they earn in three ways. These are as follows,
1. Income from Dividend or Bond Interest Gain
Investors can earn from dividends on shares of stocks and interest on bonds that are included in a portfolio. Investors can choose to receive dividends and earn from them, or they can reinvest their dividends and earnings to buy more shares.
2. Capital Gain from Selling Securities
Investors buy units of mutual funds at a particular price. If that price increases in the future, investors can choose to sell units and earn capital profit.
Note: Both the income from dividends and capital gains under the mutual fund are taxable.
3. Increase the Price of the Mutual Fund Scheme
When the prices of mutual funds increase, and the fund manager decides not to sell them, the prices automatically go up. Here, investors can sell units of mutual funds to make a profit.
How Mutual Fund Returns are Taxed?
1. Taxation on Dividends Earned from Mutual Funds
Dividends that the investors get added in the calculation of total taxable income are taxed as per applicable slab rates. This amendment reduces the burden on small investors.2. Taxation on Capital Gains Earned from Mutual Funds
Taxation rates of capital gains earned from mutual funds depend on mutual fund type (equity, debt, and hybrid) and holding period. The holding period refers to the time between the purchase date of units of a mutual fund and the selling date of the same.3. Taxation on Capital Gains Earned from Equity Funds
Equity funds are mutual funds that primarily invest in equities (at least 65%). Investors can gain short-term capital gains (STCG) at a tax rate of 20% (irrespective of the income tax bracket they are all under) if they hold units of equity mutual funds for less than 1 year.
In case of a holding period of more than a year, the investor realizes long-term capital gains (LTCG). If investors sell units after 1 year and gain ₹1 lakh, these are tax-exempt. However, if the gains cross the threshold of ₹1 lakh, they attract a long-term capital gains tax of 12.5% without indexation on amounts exceeding ₹1 lakh.
4. Taxation on Capital Gains Earned from Debt Funds
Debt funds are mutual funds that invest in fixed-income securities like bonds, treasury bills, etc. Investors can gain short-term capital gains (STCG) tax if they redeem units of debt funds within 36 months. Here, the debt mutual fund taxation will occur according to the applicable income tax slab rates. Capital Gains from debt funds are included in the Total Taxable Income of the person.
On the other hand, if one sells units of debt funds after a holding period of 36 months, the taxation on long-term capital gains (LTCG) will occur at a rate of 20% with indexation. Debt fund taxation will further include cess and surcharge.
5. Taxation on Capital Gains Earned from Hybrid Funds
The taxation of hybrid funds or balanced funds occurs as per the equity exposure of a portfolio.
If a portfolio has an equity exposure of more than 65%, then the taxation follows similar rules to that equity mutual fund taxation policy.
On the other hand, in case the equity exposure is less than 65%, then the taxation follows similar rules of debt fund taxation policy. In addition, if a hybrid or balanced fund has 50% investment in equity and 50% investment in debt, the taxation rule will follow the debt fund taxation policy.
6. Taxation of Capital Gains Invested Through SIP
Systematic Investment Plans (SIPs) are investment methods where investors make small investments periodically (weekly, monthly, quarterly, bi-annually, or annually) in a mutual fund scheme.
In case investors sell units of a mutual fund invested through SIP after holding it for more than 1 year, investors can realize long-term capital gain (LTCG) on that purchased unit. Here, there is no SIP taxation if the gains do not exceed ₹1 lakh.
On the other hand, investors can start getting short-term capital gains (STCG) from the second month onward. Here, irrespective of income tax slab, investors have to pay 15% tax on these gains, including applicable cess and surcharge. The taxation rules differ in the case of investors investing in mutual funds through Systematic Investment Plans (SIPs).
Take a glance at the table mentioned below to understand the diverse types of mutual funds, their different holding periods, and applicable tax rates.
Mutual fund taxation is indeed a complex topic. However, after reading the sections mentioned, understanding the same is not an issue anymore. Now, investors can make an informed investment decision as per their investment goals and risk appetite.
Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.
We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.
FAQs about Mutual Fund Taxation
Do investors of the hybrid equity-oriented fund have to pay Securities Transaction Tax (STT)?
Do you have to pay Securities Transaction Tax if you sell a debt fund unit?
Is it possible to avoid the capital gains tax?
Other Important Articles about Mutual Funds
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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