Mutual Fund Taxation in India: Factors You Should Keep in Mind

Mutual funds are subject to taxation, which can take several forms. Capital gains distributions from mutual funds are taxable in the year they are paid, regardless of the purchase date of your mutual fund shares. Short-term capital gains distributions may also be treated as ordinary income, while long-term capital gains distributions qualify for a lower tax rate depending on your taxable income bracket.

Keep reading to learn more about mutual fund taxation, including how mutual funds are taxed and what taxes you may be subject to when investing in mutual funds.

What are Mutual Funds?

A mutual fund is an investment vehicle that pools money from multiple investors and invests in stocks, bonds, or other securities. Investors receive shares of the mutual fund proportional to their contributions. Each share represents an ownership interest in the mutual fund portfolio. The returns on mutual funds can vary depending on how well the mutual fund performs.

What are the Factors that Determine the Tax on Mutual Funds?

In India, mutual funds are taxed according to the income tax slab rate you fall under. So the taxes on mutual funds largely depends on the following:

  • Holding period: Mutual funds are subject to short or long-term capital gains taxes, depending on how long you hold your mutual fund units before selling them.
  • Type of mutual fund: Different types of mutual funds have different tax implications. Equity mutual funds are generally treated as short-term assets and are taxed at a higher rate than debt mutual funds.
  • Source of fund income: Besides having taxes on gains from mutual fund investments, dividend payments from mutual funds can also be taxable as ordinary income.
  • Dividend: Mutual funds that pay dividend distributions to their investors must withhold taxes at 10%.

Capital Gains: If you sell mutual fund units before the minimum holding period of 12 months, you may be subject to short-term capital gains taxes. On the other hand, if you hold mutual fund units for more than 12 months, your gains will be taxed at 10% with indexation benefits.

How Can I Reduce My Taxes on Mutual Funds?

There are a few ways to reduce your tax burden on mutual funds:

  • Take advantage of tax-saving mutual funds: Tax-saving mutual funds (ELSS) offer investors tax deductions up to Rs 1.5 lakhs in a financial year under Section 80C of the Income Tax Act.
  • Utilise indexation benefit: Indexation benefit can help lower your tax on mutual funds by adjusting the purchase cost of fund units for inflation.
  • Invest in dividend mutual funds: Dividend mutual funds pay out dividends regularly, which are not taxable as long as they fall under the dividend distribution tax slab rate.

Conclusion

While taxes on mutual funds can be complex, understanding the rules and regulations can help you minimize your tax burden. At Shoonya by Finvasia, they simplify the process of investing in mutual funds with no hidden charges or fees. Sign up today to start investing smarter and growing your wealth more efficiently.

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