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.
