What are the tax implications of investing in mutual funds? It is a question I frequently come across online. Okay, first, let’s get one thing straight. In India, you have to pay a tax when you earn a profit either by doing business, selling any commodity or even getting returns from your investments. And mutual funds are no exception to this rule. Between all the meticulous planning, it’s easy to overlook the tax implications of investing in mutual funds since all we focus on is the generated returns.
Taxes paid on mutual funds can get a bit confusing since there are multiple points to remember like type of fund, duration of investment, tax slab etc. Allow us to simplify this for you.
There are two main ways to earn by investing in a recognised mutual fund.
Certain mutual funds offer a dividend payout component, meaning you can earn from the dividends issued by the stocks in the mutual fund you invested in. The dividend is received in proportion to the number of shares you hold via the mutual fund.
Initially, dividends were tax-free when investors received them as companies paid Dividend Distribution Tax (DDT) before they shared the profits in the form of dividends. Dividends upto ₹10 lakh were tax-free and anything above would attract a 10% DDT.
However, the Union Budget made amendments in 2020, stating that dividends received from these funds will be taxed normally, meaning the dividends will be added to your taxable income. Additionally, if the dividends cross ₹5,000, then a TDS of 10% will be levied. If the PAN and Aadhaar are not linked, TDS will be 20%.
The profit you earn after selling an asset at a higher price than what you initially bought is known as a capital gain. Suppose you buy units at ₹1000 and they generate a return of 10%. After some time, the value of your units will be ₹1100, and if you sell the units, then ₹100 earned is taxable.
Capital gains are taxable only after the asset is sold. The tax implications of investing in mutual funds depends on the scheme and the tenure of the investment. For making calculations simpler, mutual funds are categorised below
Apart from the above LTCG and STCG tax, a 0.001% Securities Transaction Tax is levied by the government when units of an equity fund or hybrid equity-oriented funds are sold. It is very similar to Tax Deducted at Source (TDS). Having STT helps keep a tab on taxpayers from evading taxes by not disclosing the profit from the sale of these units.
In short, no. A Systematic Investment Plan or SIP allows you to invest a particular sum every month or quarter in a mutual fund scheme. Suppose you invest in a mutual fund scheme, and after 13 months, you withdraw them. Since these funds are held for more than one year, you will get long-term capital gains. If the gains are less than ₹1L, you don’t have to pay tax.
If you withdraw before 12 months, you will receive short-term capital gains taxed at 15% + surcharge + cess, irrespective of your income tax slab.
Just keep in mind that the longer you stay invested, the better it is. The tax implications of investing in mutual funds may seem intimidating at first, but it begins to make more sense as you keep investing. As the adage goes, Rome wasn’t built in a day.
All you need to ensure is that you’re clear on your goals, read the products carefully, and do your homework. You can always take the help of Fi’s online calculators before taking the final plunge.
Fi Money has many in-depth calculators for personal finance
The tax depends on the mutual fund scheme and the tenure of the investment. Any dividends made from Mutual Funds are if the dividends cross ₹5,000, then a Tax Deducted at Source (TDS) of 10% will be levied. If the PAN and Aadhaar are not linked, TDS will be 20%.
Long Term Capital Gains Tax: Any profit you make from the sale of an investment, held for an extended period, be it stocks or real estate, results in Long Term Capital Gains tax. The duration varies for different assets.
Example: For stocks & bonds > over 1 year.
Gold > over 3 years.
Short-term capital gain tax: It is levied on capital gains from the sale of an asset held for a short period. Did well in the stock market? Just sold an asset that you held for a brief period? Then, get ready to shell out some hefty charges as Short-Term Capital Gain tax! A type of tax that needs to be paid by you for the profits gained from short-term investments.
P.S Apart from LTCG & STCG tax, a 0.001% Securities Transaction Tax is also charged when units of an equity fund or hybrid equity-oriented funds are sold.
The rule of the game is to stay invested longer. The longer you hold your mutual funds, the more tax efficient they become.
Equity Funds
STCG: 15% + surcharge + cess
LTCG: Up to ₹1 lakh a year is tax-free. Beyond that is taxed at 10%
Debt Funds
STCG: Taxed based on income tax slab
LTCG: 20% + surcharge + cess
Hybrid Equity-oriented Funds
STCG: 15% + surcharge + cess
LTCG: Up to ₹1 lakh a year is tax-free. Beyond that is taxed at 10%
Hybrid Debt oriented Funds
STCG: Taxed based on income tax slab
LTCG: 20% + surcharge + cess
Note:
STCG stands for Short-Term Capital Gains
LTCG stands for Long-Term Capital Gains
No. Mutual funds are not tax-exempt. Like all things, you have to pay taxes if you earn a profit on your investments. The good thing is that mutual funds, when used right, are tax efficient. Plus, there are mutual funds that help you save on income tax
ELSS: Planning to dabble in mutual funds for tax-saving benefits? Check Equity Linked Saving Schemes (ELSS). Unlike other equity funds, it enables you to invest in stocks while remaining eligible for tax deductions (upto ₹1.5 lakh)! The caveat here is a 3 year lock-in period.
ULIP: It's insurance + investment! Here part of the premium paid gets invested (as per choice) & the rest becomes part of an insurance policy. Unit Linked Insurance Plan (ULIP) also offers tax benefits! Sounds like a winner, right? Before opting in, dig deeper into the fees.
.jpeg)
.jpeg)
.jpeg)
