Mutual Funds Taxation – Simply Explained
Generally, there is no TDS (Tax Deducted at Source) applicable for the Mutual Funds and Shares in India. One should declare these type of income as ‘Other source of income’ while filing the Income Tax returns.
For the Mutual Fund schemes, the Taxation is divided into two categories – Debt Funds and Equity / Hybrid Funds. Hybrid Funds (Earlier Balanced Fund) is a combination of both debt and equity based funds.
In case of Investing in Debt oriented funds, the holding period of a funds will tells the taxation rate. As you can see in the below table, If an investor redeem his money from the debt fund with in three years from the time of investment, then he or she will be taxed as per the Income Tax Slab. If the holding period is more than 3 years and the redemption is happening, then the Tax rate would be 20 percent with Indexation Benefit.
For instance, Rs. 1 Lakh will be invested in a Debt Fund Scheme of a particular AMC (Asset Management Company). After 10 months, the total value of investment is 1,06,000 /- rupees. If the investor withdraw his money totally or partially, then it would considered as Short term Capital Gains – STCG (redemption within 3 years) and the tax rate would be as per the Investor’s Income Tax Slab. There is no tax for the Short term Capital Gains for the Debt Funds, if an investor is not an income tax payer or Under Tax Slab.
If the investor withdraw his money after the holding period of 3 years partially or Fully, then the tax rate would be 20 percent with Indexation, whether he is a Tax Payer or Not. The Tax rate is applicable only for the returns earned, but not for the Initial Investment. Here the Capital gains for the ten months period is 6,000 rupees. If he redeems within 3 years and his income tax slab is 5 percent, then the tax rate is Rs. 300/- (6000 X 5%).
For the redemption after 3 years, if the total value of investment is Rs. 1,25,000 /- then the tax will apply for the 25,000/- rupees earned which is considered as a Long term Capital Gains (LTCG). After the deduction of Indexation Cost, the tax would be 20 percent. If the Indexation cost is Rs. 12,000 /- then (25,000 – 12,000) the tax will be calculated for the amount of Rs. 13,000 /- which is Rs. 2600 /- (13000 X 20%).
The Income received after the Indexation cost and 20 percent tax rate, still it will be healthy than the Bank Fixed Deposits. Kindly note that the Bank Deposits have a TDS amount and there is no Indexation benefit there.
For the Equity and Hybrid Funds, the Short term Capital Gains tax is 15 percent, if the redemption happening within one year of its investment. For more than one year holding period, the tax would be 10 percent if the Long term capital gains exceed the amount of Rs. 1 Lakh.
If you have an investment of Rs. 10 lakh and the total value of investment is Rs. 12 lakh after one year. At this time, if one withdraws the total amount of 12 Lakh rupees, then the Tax of 10 percent applicable after deducting an amount of Rs. 1 Lakh as per the Budget India 2018. Now, the tax rate is Rs. 10,000 /- plus other charges if any (1,00,000 X 10%).
Similarly One can get the benefits from the loss of investment in Mutual Funds and Stocks.
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