Tax On Mutual Funds In India | How Are Mutual Funds Taxed In India

The tax on Mutual Funds (read basics of mutual funds)is different for resident individuals, NRIs and corporate. Taxes are an inevitable part of our earning, spending and investing cycle. There is a whole gamut of taxes we pay for the different activities we perform, for the purchases we make, and for the benefits we receive. And as such Mutual Funds are not to be forgotten as these comprise the major part of an individual’s investment portfolio in the current times.(Read mistakes not to be made while investing in mutual fund)

Taxation on Mutual Funds - How mutual funds are taxed?
Taxes on Mutual Funds in India
Let’s see how mutual funds are taxed for individuals in India:
  1. Mutual funds are taxed under the head ‘Income from Capital Gains’ as a part of Income Tax.
  2. Any capital appreciation gained on an investment in mutual fund held for less than 12 months for equity mutual funds and 36 months for debt mutual funds before selling off is termed as Short Term Capital Gain (STCG).
  3. Any capital appreciation gained on an investment in mutual fund held for more than 12 months for equity mutual funds and 36 months for debt mutual funds before selling off is termed as Long Term Capital Gain (LTCG).
  4. The tax rate is different for debt and equity mutual funds.
  5. A mutual fund scheme is said to be equity oriented only if at least 65% of the average weekly net assets is in Indian equities.
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  6. STCG of a debt mutual fund and the STCG and LTCG profits on sale of other kinds of mutual funds are just added to the income of the individual and taxed as per the income tax slab rates.
  7. In case of hybrid mutual funds the tax rate is similar to equity mutual funds because in hybrid mutual fund schemes at least 65% of the money is invested in equity derivatives.
  8. STT/ Securities Transaction Tax of 0.001% is levied on every sale of units of an equity mutual fund schemes that are listed on the stock exchange over and above the above mentioned tax rates.(For more on STT/ Securities Transaction tax read what is securities transaction tax)
Let’s understand how indexation impacts a mutual fund investor through an example

A. 10% without indexation on profits on sale of Debt oriented mutual funds
Suppose Mr. Ram had purchased 10 units of a debt mutual fund with each unit @Rs. 10, thus investing Rs.100. After 3 years he decides to sell the mutual fund units and as on that date the value of each unit is Rs. 20 thus making his investment worth Rs. 200. Therefore his overall long term gain is Rs.200-Rs.100=Rs.100. He will have to pay 10% on the profit of Rs. 100 i.e., Rs.10.

B. 20% with indexation on profits on sale of Debt oriented mutual funds
Using the example as above, we also understand that the value of Rs. 100 3 years ago while investing was obviously more than it is on the date of sale of the units. This is because of the inflation in the economy. So, what an indexation provides investors selling their investments is to include the loss in the value of money due to inflation over the years of investment. So, suppose there has been an inflation of 15%, then the current value of the old Rs. 100 is Rs. 115 and the present sale value is Rs. 200. Therefore the profit is Rs. 200-Rs.115=Rs.85. Now, the investor will have to pay a 20% tax rate on the profit on sale which comes up to Rs. 17.

As it is up to the investor to choose the way he wants to pay tax on LTCG on his debt mutual funds, it is clearly evident that he saves more tax without opting indexation benefit.(Read 20 things to consider while investing in mutual fund).


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