Decisions related to investing in Mutual Funds involve proper planning and analysis. Every investor thinks of the benefits they will get in their hands. So, they need to be aware of the government taxation policies before investing.
This article will help you understand taxation well to plan your investment.
Factors affecting the taxation on Mutual Funds:
Let us give you a detailed understanding of the factors one by one.
- Nature of Funds:
Mutual Funds are mostly of two kinds – Equity-oriented Mutual Funds and Debt-oriented Mutual Funds.
- Nature of Gains generated:
The gains generated are of further two types – Capital gains and Dividend gains.
The profits earned by the company on selling the assets at prices higher than their market value is known as Capital gain.
The dividend is a part of accumulated profits that is given to the shareholders as a reward for their investment.
- Holding Period:
The duration of the investment determines the tax deductions out of your profits. The longer the duration the lower will be the taxes and vice versa.
Now, the section comes where you will get the thorough details of the taxes on all the incomes individually.
- Taxation on Dividends:
As per the Finance Act, 2020 amendments the dividend distributed to the Mutual Fund Investors is taxable in the hands of the investors. Earlier the tax is deducted at AMC only and was tax-free for the investors. But now, TDS is deducted by AMC at the fund house and then the investors are supposed to pay the tax over and above the TDS.
- Taxation on Capital Gain:
Taxation is dependent on the factors, of how long you keep your money invested in a particular investment scheme. The longer the duration, the lower the taxes deducted from the earnings.
Now the question is, what is the duration for short-term and long-term? The long-term for Equity is usually 12 months, and for Debt-oriented funds it is more than 36 months.
- Taxation on Equity:
When Mutual Funds of up to 65% are invested in Equity Funds are known as equity-oriented Mutual Funds. The rest of the investment goes to debts.
Long-term Capital Gains on Equity Schemes:
Equity-oriented mutual fund schemes were previously exempt from LTCG u/s 10(38), but this changed in 2018. As of today, LTCG income tax on mutual funds (equity-oriented schemes) is charged at 10% on capital gains over ₹1 lakh as per section 112A of the Income Tax Act, 1961.
Short-term Capital Gains on Equity Schemes:
Under section 111A of the Income Tax Act, 1961, short-term capital gains on equity schemes are taxed at 15%.
- Taxation on Debt:
Taxation for debt-oriented Mutual Funds is a simple and efficient method. Even in the case of debt, the taxation policy is different in both the long and the short-term cases.
Long-term capital gains on Debt Schemes:
Section 112 of the Income Tax Act of 1961 imposes a 20% LTCG tax on debt-oriented schemes with indexation benefits. Tax benefits from indexation make debt mutual fund schemes tax effective. It accounts for price increases (inflation) as measured by the Cost Inflation Index. (CII, as provided by tax departments).
Short-term capital gains on Debt Schemes:
The tax is charged as per the slab rate of the assessee. If the income of an assessee is more than Rs.10,00,000, then the tax rate will be 30% on all the earnings.
Conclusion:
The taxability of Mutual Funds is dependent on the determination of the nature of the Mutual Funds. Once you know the nature of funds and their taxation charges, you can plan your investment smartly to pay the minimum taxation to the government. To your advantage, along with the taxes, you can save the brokerage charges by starting your Investment journey with Shoonya- India’s First Commission Free Trading Platform.