How Is Your Mutual Fund Taxed?

Mutual Fund Taxation is a lesser known concept, at least relative to the comparison of the performance viz. 1, 2, 3 5 years and so on. However, what if you come to know that there is no such specific taxation for Mutual Funds at all. Taxation applies for asset classes such as Equity and Debt and Mutual Funds taxation depends on the category that they fall under i.e. either Equity or Debt. It is important to know the taxation structure before choosing any asset class, including Mutual Funds. It helps you to understand the time frame you need to invest in order to make the most of the investment. Otherwise, you could land in a soup. Let us check how Mutual Funds falling under the two asset classes, namely Equity and Debt are taxed.

Short Term Capital Gains Tax

Equity

The time frame for Equity Mutual Funds to be taxed as Short Term Capital Gains (STCG) is 1 year. All equity oriented mutual funds are taxed at 15% flat if redeemed within 1 year of investment/purchase. Tax is imposed on the capital gains i.e. profit gained from the investment rather than on the entire maturity amount. Equity as a category includes large cap, mid cap, small cap and so on.

Debt

The time frame for Debt Mutual Funds to be taxed as Short Term Capital Gains (STCG) is 3 years. If redeemed within the said time frame, the capital gains or profits are added to the individual’s tax slab and taxed accordingly. Debt includes liquid funds, income funds, gilt funds and so on.

Long Term Capital Gains Tax

Equity

The time frame for Equity Mutual Funds to be taxed as Long Term Capital Gains (LTCG) is 1 year. All equity oriented mutual funds are fully tax free if redeemed after 1 year of investment/purchase. This is one of the best options provided to every investor. The post tax returns of equity mutual funds are hence extremely attractive due to this facility.

Debt

The time frame for Debt Mutual Funds to be taxed as Long Term Capital Gains (LTCG) is 3 years. If redeemed after the said time frame, the capital gains or profits are taxed at 10% without indexation or 20% with indexation. Indexation is a benefit provided to the debt fund investors through which the investor can show an increased cost of acquisition and hence lower the overall tax. The post tax returns of debt funds can be maximized through indexation benefit and as a result could be much higher than other traditional investments such as FDs.

Points to Note

• In case of ELSS, every SIP installment is treated as a separate investment and as we know, there is a lock in of 3 years in case of ELSS. Hence, it is suggested to avoid SIPs in ELSS funds to avoid any complications during redemptions.
• Hybrid/Balanced funds are treated as equity or debt funds for tax purpose according to the percentage of holding in the said categories. Typically, they are treated as equity funds for tax purpose if their equity holding is greater than 65% or debt, if held otherwise.

Information Courtesy : Karvy Value Blogs