Moneyvesta - Mutual Fund Investment

By Moneyvesta posted on November 1st, 2023

TAX ON MUTUAL FUND

Tax on Mutual Fund refers to the tax liability related with investing in mutual fund.

Determinants in the Taxation of Mutual Fund

The essential factors that affect the taxes are following:

1. Types of Funds- Taxation on mutual funds is dependent on the asset class (such as debt, equity, etc.) a particular scheme is invested in.

2. Holding Period- Capital gains are divided into short- term & long -term capital gains depending on the holding period of individual asset classes.

Taxation of capital gains of Equity/Debt Funds

Based on the above factors, equity and debt funds are taxed as per the table below:

	On or before 1 April 2023		Effective 1 April 2023
Funds	Short -term Gains	Long-term Gains	Short -term Gains	Long-Term Gains
Debt – Fund	At tax slab rates of the individual	10% without indexation or 20% with indexation whichever is lower	At tax slab rates of the individual	At tax slab rates of the individual
Equity- Fund (Holding period >1 year is considered for LTCG)	15%	10 % over and above Rs. 1 Lakh without indexation	15%	10 % over and above Rs. 1 Lakh without indexation

Note: Tax rates are excluding surcharge and cess

Taxation of capital gains of Hybrid Funds

Relative amount of debt/equity exposure in the portfolio determines the capital gain tax rate for hybrid or balanced funds.

Equity Holdings	0 to 35%	35% to 65%	65% and above
Short-term capital gain taxation	As per your tax slab	As per your tax slab (holding period less than 36 months)	15% tax (holding period less than 12 months)
Long-term capital gain taxation	As per your tax slab	20% with indexation benefit (Holding period greater than 3 years)	No tax up to capital gain of Rs.1 lakh 10% tax over and above Rs. 1Lakh capital gain (holding period more than 12 months)

Note: Tax rates are excluding surcharge and cess

Taxation of Interest/Dividends

Dividends/Interest that investor receive are added to their taxable income and taxed at the rates applicable to each income tax slab.

Taxation of Capital gains when Invested through SIPs

Taxation of units in SIPs is applicable on first -in first-out basis. Let’s take an example, assume you make a one-year SIP investment in an equities fund and wants to redeem your full investment after 13 months.

In this situation, units purchased first through SIPs are kept for long period of time (over a year), and you realize long -term capital gains on these units. If your long -term capital gain is less than Rs.1 lakh, you are exempt of paying tax.

Short- term capital gains are made on units purchased through SIPs beginning in the second month. These profits are taxed at a flat rate of 15%, irrespective of your income tax bracket. You will be required to pay the applicable tax and fee.

Conclusion

The income from long-term capital gains is generally subject to lesser taxation when compared to income from short-term capital gains. Therefore, investors with longer holding periods enjoy lower tax liabilities.

Disclaimer: Mutual fund investments are subject to market risks, please read all scheme related documents carefully before investing. Please consult your financial advisor for investment decisions.

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