Jan 01, 1970 3 min read

Here are the Mutual Fund Taxation Rules You Should Know

Don’t get confused between the various tax rules of the mutual fund, we have simplified the same here.
If taxes are a matter of concern for you, then the rules mentioned here would help you a lot. The Income Tax Act has different provisions, it is just the matter of understanding and evaluating the facts to make the most of them. Capital assets are the assets of any nature which are used for personal or investment purposes.

When they are sold off the income that arises in the form of profits is considered capital gain. In the case of mutual funds, where the securities are termed to be capital assets, there are different provisions for the taxation. Let’s have a look at them.

Before we understand the provisions related to taxes in the mutual funds, we must evaluate the meaning of capital gains. As we know that mutual funds are capital assets by nature, the profits which are gained by the investors at the time of selling the fund are termed as capital gain. There are provisions in the Income Tax Act which deal with the tax rates or charges applicable to the capital gains. On the basis of duration and type of fund you hold, the capital gain is classified into two parts.

1. Long-Term Capital Gain

The rules for long-term capital gain, i.e., LTCG are different for equities and debt instruments. In mutual fund as well, the same rule applies. If equity-oriented mutual fund (those having at least 65% of the asset allotment in the equity shares and securities) are held for one year or more, then the profits earned on selling the same are LTCG. However, in the case of debt mutual funds, long-term capital gain arises if the fund is held for three years or more and then sold at a profit.

As per the Union Budget 2017-18, the long-term capital gain from equity-oriented mutual funds is not taxable. On the flip side, the LTCG on debt mutual funds rate chargeable to tax the rate of 20% with indexation benefit.

2. Short-Term Capital Gain

The profits earned from selling the equity funds before one year of investment are called short-term capital gains. On the other hand, the profits fetched by the investor on selling the debt funds before three years of investment are the STCG. As per the Union Budget 2017-18, the short-term capital gain on equity funds is taxable at the rate of 15%, while the STCG on debt funds are chargeable to taxes as per the normal slab rate under which the individual falls without any indexation benefit.

Implication of Tax Rates on Dividend Pay-Outs & Reinvestment

Dividends in a mutual fund are not an additional benefit like in the case of equity investments. This is because the dividend which is payable or reinvested by the fund house is deducted from the NAV of the scheme. In the case of dividend payout, the dividend declared is payable to the investor whose value is deducted from the NAV of the scheme. However, in the case of dividend reinvestment, the dividend declared is although deducted from the NAV, the reinvested amount fetches more number of units to the portfolio. This helps one in raising the invested capital by more number of units in the portfolio.

The dividend declared by the fund house is liable for Dividend Distributed Tax (DDT) which is paid by the AMC itself. In the case of equity funds, there is no DDT applicable, but for debt funds, the dividend distribution tax is charged at the rate of 28.84%. However, this is not directly payable by the investor, it has a significant impact on the overall cost.

So now, it must be clear to you that taxation rules in mutual funds are quite simple and it is more beneficial if you opt for equity mutual funds in India, as they provide high capital growth without any tax implications in the long run. MySIPonline provides an online platform to invest in the best-performing equity funds in India to initiate a journey towards wealth creation.

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