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How are your mutual fund returns taxed
Posted by : Anonymous on Nov 03,2016 01:01 PM
The returns earned from
are taxed under the head 'Income from
Many mutual fund investors are a bit confused about the
of returns from investments. Investment experts are always busy answering questions like should I pay tax on my mutual funds or will my investment qualify for a tax deduction. Experts say the different treatment of
returns for calculating the tax liability is the main reason for the confusion.
The returns earned from mutual funds are taxed under the head 'Income from Capital Gains.' And capital gains can be short-term or long-term based on the holding period of investments. And tax rates are different for both. Moreover, the capital gains rules are different for equity and non-equity schemes.
All that sounds too confusing? Don't worry. We will make it easy for you.
Taxation of equity schemes
A mutual fund scheme qualifies to be taxed as an equity scheme if it invests at least 65 per cent of the total corpus in equity and equity related instruments.
Returns from an equity mutual fund are treated as long term capital gains if investments are held for more than a year. Such returns are completely exempt from income tax according to the current laws.
However, if investments are held for one year or less, the returns are taxed under short term capital gains. Such returns are taxed at 15 per cent.
Taxation of debt schemes
Mutual fund schemes that invest less than 65 per cent of the corpus in equity are categorised as non-equity funds for the purpose of taxation. Your debt mutual funds fall under this category.
Also, gold funds, fund of funds, international funds, etc are categorised as non-equity schemes for the purpose of taxation.
Returns from non-equity funds are treated as long-term capital gains if investments are held for more than three years. And the returns are taxed at 20 per cent with the indexation benefit. Indexation is a procedure of inflating the purchase cost to account for inflation with the help of a price index. The process reduces the taxable profits.
If investments are held for three years or less, the returns are treated as short-term capital gains. Such gains are added to the income and taxed as per the income tax rate applicable to the investor.
Taxation of hybrid schemes
Hybrid schemes can be either equity-oriented or debt-oriented. The scheme information document would clearly specify the investment pattern, making it clear whether the scheme qualifies to be an equity fund or a debt fund.
Needless to say, you should pay attention to this factor while investing in a hybrid scheme because the tax liability is very different for equity and non-equity schemes.
How to calculate the holding period?
Holding period is determined from the date of purchase of mutual fund units till the day you sell them. In case of a Systematic Investment Plan (SIP), you are purchasing certain number of units every month or quarter and the period of holding has to be calculated individually for all these purchases.
For example, you have started an SIP in an equity scheme from January to June 2016. Units purchased in June 2016 will complete one year for the purpose of taxation only in June 2017, not January 2017.
How are dividends taxed?
If you have invested in a mutual fund scheme under the dividend option, you may receive dividends. You don't have to pay any tax on them as dividends are exempt from income tax in the hands of the investor in both equity and a debt schemes.
However, mutual fund houses pay Dividend Distribution Tax of 28.84 per cent on dividends declared under debt schemes. In that sense, your dividends from debt funds are taxed.
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