GUIDESPERSONAL FINANCE
GUIDES
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.
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.
Previously, dividends were tax-free as companies paid Dividend Distribution Tax (DDT). Dividends up to ₹10 lakh were exempt, and above that, a 10% DDT applied. However, the 2020 Union Budget changed the rules. Dividends are now taxed as part of your taxable income. If dividends exceed ₹5,000, a 10% TDS is applied, or 20% if PAN and Aadhaar are not linked.
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. 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. Explore other in-depth Fi Money calculators here.
Mutual fund dividends exceeding ₹5,000 are subject to a 10% TDS, or 20% if PAN and Aadhaar are not linked. Long-term capital gains tax applies to assets held for a specific period, e.g., stocks and bonds for over 1 year, gold for over 3 years. Short-term capital gains tax is levied on profits from the sale of assets held for a short period. Additionally, a 0.001% Securities Transaction Tax is charged when selling units of equity or hybrid equity-oriented funds.
The rule of the game is to stay invested longer. The longer you hold your mutual funds, the more tax efficient they become.
STCG: 15% + surcharge + cess
LTCG: Up to ₹1 lakh a year is tax-free. Beyond that is taxed at 10%
STCG: Taxed based on income tax slab
LTCG: 20% + surcharge + cess
STCG: 15% + surcharge + cess
LTCG: Up to ₹1 lakh a year is tax-free. Beyond that is taxed at 10%
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
Individuals who earn capital gains during a financial year are required to declare their earnings through mutual funds in their Income Tax Return (ITR).
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