Mutual Fund Taxation

Mutual Fund Taxation

Review

How are Mutual Funds Taxed?

Mutual funds are one of the best vehicles of investment as they help investors achieve their financial goals along with being tax efficient.

Tax levied on mutual funds is basically through two sources –

  • Dividend
  • Capital Gains/ Profit

 

Mutual Fund Dividend Tax

According to the amendments made in the Union Budget for 2020, dividends provided by investment funds will be taxed in the traditional way. In other words, dividends received by investors are added to taxable income and are taxed at their respective income tax slab rates.

 

Mutual Fund Capital Gains Tax

Here taxes depend on the type of mutual fund and the holding period. The duration for which an investor holds the mutual fund units is called holding period and it differs amongst mutual funds.

Type of mutual fundHolding period (Short Term Captial Gains)Tax (Short Term Capital Gains)Holding period (Long Term Capital Gains)Tax (Long Term Capital Gains)
Equity Funds< 12 months15% + cess + surcharge12 months +1 lakh per year is tax exempt. Above 1 lakh taxed at 10% + cess + surcharge
Debt Funds< 36 monthsInvestor’s income tax slab rate36 months +20% + cess + surcharge (with indexation)
Hybrid equity-oriented funds< 12 months15% + cess + surcharge12 months +1 lakh per year is tax exempt. Above 1 lakh taxed at 10% + cess + surcharge
Hybrid debt-oriented funds< 36 monthsInvestor’s income tax slab rate36 months +20% + cess + surcharge (with indexation)
Fund of Funds< 36 monthsInvestor’s income tax slab rate36 months +20% + cess + surcharge (with indexation)

Note: An important point to note in mutual funds is that, an incident of tax payment arises only on the sale of units of the scheme.

 

Elss Mutual Fund Tax Benefit

Upto 1.5 lakh in taxes can be saved per year on investments in ELSS as per Section 80C . This 1.5 lakh per year is an aggregate number containing PPF, National Savings Certificate, life insurance etc.

Since ELSS funds have a lock in period of 3 years, the long term capital gain of 10% will be taxed on capital gains amount exceeding 1 lakh.

 

What is Security Transaction Tax (SST)

A Securities Transaction Tax (STT) of 0.001% is levied by the government (Finance Ministry) on all purchase and sell of all mutual funds of equity and hybrid equity-oriented fund. No STT is levied on debt funds.

 

*Data as on 21st January 2022

Also, have a look at Best Small Cap Mutual Funds & AMC Profiles,  If you need any assistance on Mutual Fund Taxation or How To Invest In Mutual Funds Feel free to contact Wealth Baba – Financial Planner & Investment Advisor in India. We will try to help you out in the best possible way.

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