Understanding how mutual funds are taxed is essential for any investor aiming to maximize returns and stay compliant. Whether you invest in equity or debt mutual funds, taxes can significantly impact your overall gains. Let’s break down the taxation rules and what they mean for you.
Taxation on Equity Mutual Funds:
Equity mutual funds invest at least 65% of their assets in stocks. The tax treatment depends on your holding period:
- Short-Term Capital Gains (STCG): If you redeem your equity fund units within 12 months, the gain is taxed at 15%, plus applicable surcharge and cess.
- Long-Term Capital Gains (LTCG): For holdings longer than 12 months, gains over ₹1 lakh per year are taxed at 10%, without indexation.
For example, if your equity mutual fund earns ₹1.5 lakh in a financial year, ₹50,000 is taxable at 10%.
Taxation on Debt Mutual Funds:
Debt mutual funds are taxed differently, especially after recent changes. As per the Finance Act 2023, all capital gains from debt mutual funds—regardless of holding period—are taxed as per the investor’s income tax slab rate if the fund invests less than 35% in equity.
Earlier, long-term gains (after 36 months) enjoyed a 20% rate with indexation. However, this benefit is now removed for most debt funds. This change has made Systematic Investment Plans (SIPs) in debt funds less tax-efficient than before.
Dividends from Mutual Funds:
Mutual fund dividends are now taxed in the hands of investors. After the abolition of the Dividend Distribution Tax (DDT) in 2020, all dividends are added to your income and taxed as per your slab.
For instance, if you fall under the 30% tax bracket and receive ₹10,000 as dividends, you’ll pay ₹3,000 in taxes. Moreover, fund houses deduct a TDS of 10% on dividends exceeding ₹5,000 in a financial year.
Tax-Saving Mutual Funds (ELSS):
Equity Linked Savings Schemes (ELSS) offer a tax deduction of up to ₹1.5 lakh under Section 80C. These funds come with a 3-year lock-in and are among the shortest lock-in options among tax-saving instruments. However, LTCG rules still apply. Gains above ₹1 lakh after the lock-in are taxed at 10%.
According to SEBI, ELSS funds saw a 15% jump in inflows in FY2024, indicating growing interest among retail investors (Economic Times, 2024). In addition, tax-saving potential makes ELSS a preferred choice during year-end financial planning.
Conclusion:
Knowing how mutual funds are taxed in India helps you make better financial decisions and avoid tax shocks. From equity and debt funds to ELSS, each comes with different tax implications. Before investing, consider your income bracket, investment horizon, and financial goals. Also, factor in how taxes can impact your net returns. Explore more financial insights now!
– Ketaki Dandekar (Team Arthology)
Read more about How Are Mutual Funds Taxed here – https://cleartax.in/s/different-mutual-taxed