Tax Treatment of Mutual Funds

A lot of investors are unsure of the tax treatment of their mutual fund investments. Many times we advisors get calls from the investors enquiring about their tax liability even in cases when the investor hasn't made any redemption during the financial year. There is a lot of confusion regarding the topic and by this post, we would try to throw light on the taxability of mutual funds in India.

Equity Funds

An equity fund as discussed in our previous posts is one in which at least 65% of the corpus of the fund is invested in equity and equity-related instruments. Since investing in equities is risky so to compensate for the risk, the favorable tax treatment is given to equity funds.

The gains on equity funds are clubbed under short term and long term capital gains (STCG & LTCG). If the amount is withdrawn before 1 year from the date of investment then it is classified as STCG and the profit portion is taxed at 15%. Any redemption above 365 days is considered as LTCG and profits up to Rs. 1,00,000 are exempt. On profits higher than Rs. 1,00,000 a tax of 10% is levied.

Non-Equity Funds / Debt Funds

The tax treatment of any other fund which has less than 65% of equity and equity-linked instruments in its portfolio is similar. Even in this case, the taxation is STCG and LTCG but the amount of tax and time period under STCG and LTCG are different.

If the investment is withdrawn before 3 years from the date of investment then it falls under STCG wherein profits are added in the income of the individual and taxed at the tax slab in which the individual falls. But if the investment is kept for more than three years then it is classified as LTCG and the investor gets the option to avail indexation benefit. The tax is 10% of the total profits if the investor opts to not take indexation benefit and 20% of the indexed profit in case the investor opts for indexation benefits.

The below chart summarises the tax treatment of mutual funds:



Note:

1. Education cess and surcharge are levied over and above the tax rates mentioned above.
2. Tax is only to be paid on the profit portion, also known as capital gain.
3. If no redemption is made during the year then no tax liability arises. Taxation comes into play only if an exit is made. The value of your investment may increase by any amount, the tax play will happen only if that money is withdrawn.
4. Switches from one fund to others are counted as redemptions and attract tax.

Hope this post clears a lot of doubts regarding the tax treatment of your mutual fund investments. Still unclear? Just contact us and let us clear your doubts. And yes, don't forget to follow our blog and share it with your friends and family! Happy reading!!

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