Article

How is Income from Mutual Funds taxed?

20 Jun 2017 Priyanka Sharma

New Page 1

India is a fairly non-tax compliant economy. This is a reality! Most of the investment schemes that the government unfolds for its citizens are utilized by many as a part of their tax saving initiative, rather than their saving initiative. While the income of the salaried class is tabbed correctly as well as their interest income through the slab rate, the gains received from mutual funds, also called capital gains is taxed under separate provisions.

Mutual fund investors remain perpetually complexed about the taxation from returns of investments. Investments in mutual fund are subject to scrutiny as it involves a huge amount as well as an appetite for risk. Financial managers are always quizzed about the possibility of tax evasion, deduction and payment. The reason for the numerous questions and no uniformity in the answers of the financial experts is due to difference in treatment of mutual fund returns and different ways of calculating its tax liability.

The profit or returns earned from mutual funds are taxed under the category of 'Income from Capital Gains.' Capital gains can be short-term or long-term and this division is based on the holding period of investments. Tax rates are definitely different for both with the rules of capital gains differing for equity as well as non-equity schemes.

There is too much information to be processed, so get ready for it.


Taxation: Equity Schemes

Mutual fund schemes that invest 65% of their total corpus into equity instruments are subjected to taxation under the equity scheme provision. If an equity mutual fund is held for more than a year than the returns from that equity mutual fund are taxed under long term capital gains. The current income tax laws have exempted such returns completely from the burden of paying income tax.

Returns held for less than a year or a year are treated under the short-term gain and the returns from the same are taxed at a rate of 15%.

Taxation: Debt Schemes

Mutual fund schemes that do not invest more than 65% of the corpus in equity are termed non-equity funds and they are taxed separately. Debt mutual funds are within the ambit of this category. Gold funds, fund of funds, international funds too are categorized as non-equity schemes when it comes to taxation.

The returns of non-equity funds that have been held by the investor for more than three years are treated under long-term capital gains and the returns are taxed at 20 per cent with the indexation benefit.

What is Indexation?

It is a process by which the purchase cost is inflated to account with the help of a price index. By indexation an investor achieves a relief from taxable profits.

Investments that are held for less than three years or three years than the returns on the mutual fund scheme is considered under short-term capital gains. Such gains are added to the income and they are taxed as per the income tax rate applicable.

Taxation: Hybrid Schemes

Hybrid schemes can be either equity-oriented or debt-oriented. Before the initial investment in the equity, the information document would provide details on the specific investment pattern, making it clear for the investor that the mutual fund scheme is an equity fund or a debt fund.

Investors are expected to pay close attention to details in the terms and conditions while opting for investment in hybrid scheme because the tax liability differs from the above two described earlier.

Calculating the Holding Period

The date of purchase or investment in the mutual fund till the day it is sold is classified as the holding period. In case of a Systematic Investment Plan (SIP), an investor purchases certain units or shares of the scheme every month or quarter and the holding period for all of these need to be calculated individually.

Calculating the Taxed Dividends

Investors often invest in a mutual fund scheme under the dividend option. Investors under this option receive annual dividends and are not liable to pay any tax on them as they are exempted from income tax in both equity as well as the debt investment scheme. Though an individual investor is not taxed on dividends, mutual fund houses before declaring the dividends pay a distribution tax of 28.84%.

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How is Income from Mutual Funds taxed?

20 Jun 2017 Priyanka Sharma

New Page 1

India is a fairly non-tax compliant economy. This is a reality! Most of the investment schemes that the government unfolds for its citizens are utilized by many as a part of their tax saving initiative, rather than their saving initiative. While the income of the salaried class is tabbed correctly as well as their interest income through the slab rate, the gains received from mutual funds, also called capital gains is taxed under separate provisions.

Mutual fund investors remain perpetually complexed about the taxation from returns of investments. Investments in mutual fund are subject to scrutiny as it involves a huge amount as well as an appetite for risk. Financial managers are always quizzed about the possibility of tax evasion, deduction and payment. The reason for the numerous questions and no uniformity in the answers of the financial experts is due to difference in treatment of mutual fund returns and different ways of calculating its tax liability.

The profit or returns earned from mutual funds are taxed under the category of 'Income from Capital Gains.' Capital gains can be short-term or long-term and this division is based on the holding period of investments. Tax rates are definitely different for both with the rules of capital gains differing for equity as well as non-equity schemes.

There is too much information to be processed, so get ready for it.


Taxation: Equity Schemes

Mutual fund schemes that invest 65% of their total corpus into equity instruments are subjected to taxation under the equity scheme provision. If an equity mutual fund is held for more than a year than the returns from that equity mutual fund are taxed under long term capital gains. The current income tax laws have exempted such returns completely from the burden of paying income tax.

Returns held for less than a year or a year are treated under the short-term gain and the returns from the same are taxed at a rate of 15%.

Taxation: Debt Schemes

Mutual fund schemes that do not invest more than 65% of the corpus in equity are termed non-equity funds and they are taxed separately. Debt mutual funds are within the ambit of this category. Gold funds, fund of funds, international funds too are categorized as non-equity schemes when it comes to taxation.

The returns of non-equity funds that have been held by the investor for more than three years are treated under long-term capital gains and the returns are taxed at 20 per cent with the indexation benefit.

What is Indexation?

It is a process by which the purchase cost is inflated to account with the help of a price index. By indexation an investor achieves a relief from taxable profits.

Investments that are held for less than three years or three years than the returns on the mutual fund scheme is considered under short-term capital gains. Such gains are added to the income and they are taxed as per the income tax rate applicable.

Taxation: Hybrid Schemes

Hybrid schemes can be either equity-oriented or debt-oriented. Before the initial investment in the equity, the information document would provide details on the specific investment pattern, making it clear for the investor that the mutual fund scheme is an equity fund or a debt fund.

Investors are expected to pay close attention to details in the terms and conditions while opting for investment in hybrid scheme because the tax liability differs from the above two described earlier.

Calculating the Holding Period

The date of purchase or investment in the mutual fund till the day it is sold is classified as the holding period. In case of a Systematic Investment Plan (SIP), an investor purchases certain units or shares of the scheme every month or quarter and the holding period for all of these need to be calculated individually.

Calculating the Taxed Dividends

Investors often invest in a mutual fund scheme under the dividend option. Investors under this option receive annual dividends and are not liable to pay any tax on them as they are exempted from income tax in both equity as well as the debt investment scheme. Though an individual investor is not taxed on dividends, mutual fund houses before declaring the dividends pay a distribution tax of 28.84%.