Taxation on Mutual Funds

If you're considering mutual fund investment, understanding how your returns will be taxed is crucial. Like other asset classes, mutual fund gains are taxable. Awareness of mutual fund tax rules can help you strategize your investments to lower tax liabilities.

Latest Update:

From April 1, 2023, due to the Union Budget 2023, debt funds' indexation benefits have been removed, meaning gains will be taxed according to your tax slab. However, pre-April 2023 investments will still benefit from indexation for long-term gains.

Understanding Tax on Mutual Funds

Mutual fund taxation involves the capital gains tax on selling units within three years (short-term) at personal tax rates or more than three years (long-term).

Factors Influencing Mutual Fund Taxation in India

Mutual fund tax liability is determined by factors such as the type of funds (equity or debt), capital gains, dividends, and holding period.

How Are Mutual Fund Profits Generated?

Profits come from capital gains or dividend income. Capital gains occur when units are sold for more than the purchase price, while dividends are paid from pooled profits without selling assets.

Taxation on Dividends

Dividend income was tax-free until March 31, 2020. Now, it's taxed as per income tax slabs under "income from other sources," with a 10% TDS applicable on dividends over ₹5,000 annually.

Taxation on Capital Gains

Tax rates on capital gains differ based on fund type and holding period. Equity funds held >12 months incur long-term gains taxed at 10% above ₹1 lakh, and short-term at 15%. Debt funds, but from April 2023, are taxed as per personal slabs.

Equity-Linked Savings Scheme (ELSS)

ELSS invests >80% in equities and offers tax deductions up to ₹1.5 lakh u/s 80C, with a mandatory three-year lock-in, resulting in eventual long-term gains taxation.

Debt Fund Taxation

Post April 2023, debt funds are taxed per personal slab rates without indexation benefits, but prior investments enjoyed 20% tax with indexation.

Hybrid Fund Taxation

Tax depends on whether the fund is equity or debt-focused. Equity hybrids follow equity taxation and debt-focused ones follow debt taxation rules.

SIP Investment Taxation

SIPs tax capital gains based on unit holding; first bought units held >1 year are long-term, and others are short-term, taxed at 15%.

Securities Transaction Tax (STT)

STT is levied on transactions of equity or hybrid equity funds at 0.001% but doesn't apply to debt fund unit sales.

Declaring Mutual Fund Investments in ITR

Mutual fund redemptions necessitate detailing in ITR filings. ET Money's Capital Gains Statement simplifies this process by segregating short- and long-term profits for ease.

Final Thoughts

Understanding mutual fund taxation primarily involves knowing the holding period and scheme type. ET Money's tools can help automate calculations, minimizing manual effort during tax season.