Mutual funds offer a range of tax benefits that an investor should consider in tax planning.
Dividends and long-term gains from equity and balanced funds (that have 65% or more of their assets invested in equity) are tax free for the investor. Profits earned on Mutual Fund investments, for a period less than one year, are taxed at 15%. It is known as short-term capital gains tax.
ELSS gets an income tax deduction of Rs. 150,000, under Sec 80 C.
STT is not applicable on MF purchases, unlike in direct trading.
Short-terms gains in debt oriented funds are taxed at one’s personal income tax rate. If one comes under the lowest tax bracket, the person pays 10% tax on the gains for a period of less than 3 years. For long-term gains (holding period > 3 years), tax is 10% without indexation and 20% with indexation benefit.
When a debt mutual fund is held for more than 3 years, the investor is allowed to index ones entry price to inflation i.e. increase the entry price by the rate of inflation in the economy over the past 3 years. This higher entry price is used to calculate profit for tax purposes (it results in lower tax liability). This is unlike FDs where the entire income is taxed at personal tax slabs of up to 30%.
Equity Oriented Funds | Tenor | Individual/HUF$ |
---|---|---|
Long term capital gains | Units held for more than 12 months | NIL |
Short term capital gains | Units held for 12 months or less | 15% |
Debt Oriented Funds | Tenor | Individual/HUF$ |
Long term capital gains | Units held for more than 36 months | 20%& |
Short term capital gains | Units held for 36 months or less | 30%^ |
Tenor | Individual/HUF |
---|---|
Equity oriented schemes | Debt oriented schemes |
NIL | NIL |
Scheme Type | Individual/HUF |
---|---|
Equity oriented schemes | NIL |
Debt oriented schemes | 25% + 12% Surcharge + 3% Cess = 28.84% |
Long term capital gains from equity funds are tax free while there is tax of 15% on short term capital gains from equity funds.
Short-term capital gains from debt investments add to the income of the investor and taxed as per his tax bracket of the investor whereas long-term capital is taxed at 20% after indexation.
Capital gains from equity funds and debt funds are considered long-term if the investment horizon if more than 1 year and 3 years respectively.