Skip to main content

Capital Gain Tax on Mutual Funds

 Capital Gain simply means "Appreciation in the value of asset". Let's say you bought few shares of Reliance for Rs. 1 lakh and sells it for Rs.2 lakhs, you have made a Capital Gain Rs. 1 lakh. This capital gain comes under the purview of Income Tax Act and is taxable under the head of Capital Gain.

The applicable rate of tax is decided by the period of holding, i.e. short term and long term.

Mutual Fund is further divided into two parts

  • Equity Mutual Fund
  • Debts Mutual Fund

Before Diving into the taxation part first we want to attract our reader's attention towards the meaning of both types of Mutual Fund.

Equity Mutual Funds

Equity mutual fund means a fund where the investible corpus is invested by way of equity shares in Indian companies to the extent of more than 65% of the total proceeds of the fund, so even balanced funds will be categorized in Equity Funds.

 

Debt Mutual Funds

All the other funds which do not fit into the definition of Equity Mutual Funds, including Fund of Funds (mutual funds which invests in other funds) and International Funds (funds which have more than 35% exposure to international equities) will be kept under debt category for tax purpose.

Taxation on Mutual Funds under Capital Gain in India

Capital Gain Tax on Equity Mutual Funds

The Capital Gain is divided into two parts according to holding period.

Long Term Capital Gain: If the holding period of Mutual Fund exceeds 1 year, then it is categorized as Long Term asset and there will be no tax at the time of redemption of mutual fund units. Suppose you invested 1 lakh in UTI Mutual Fund and sold it after 1 year for Rs. 1.4 lacs, then there will be no tax on the appreciated value of UTI fund of Rs. 40,000.

LTCG is tax-free for equity mutual funds under section 10(38).

Short Term Capital Gain: If the mutual funds are held for less than 1 year i.e. you bought and sold mutual fund within a year, then it is categorized under Short Term asset and the Capital Gain arises shall be taxable @ 15% under section 111A of Income Tax Act.

In the above example, if you had sold UTI fund within 1 year then there will be tax liability of Rs.6,000 (15% on Rs.40,000) as Short Term Capital Gain.

Note for NRIs: Long Term Capital Gain is also exempted for NRIs but in case of Short Term Capital Gain there will be a TDS (tax deducted at source). Which means Tax will be deducted by Mutual Fund Company before paying redemption (sell) amount, which is 15%.

Capital Gain Tax on Debt Mutual Funds

Short Term Capital Gain: The gain arises due to redemption of debt mutual fund within 3 year (earlier 1 year) shall be added in the income of investor and tax will be charged at the rate according to the tax slab.

Suppose Mr. Sanyam has Income from house property Rs. 3 lacs and income from debt mutual fund Rs. 30,000. Then the total tax shall be 10.30% (10% slab rate + 3% Cess) on Rs.1,30,000 (Rs.3,00,000 + Rs.30,000 – Rs.2,00,000) i.e. Rs.13,390.

Long Term Capital Gain: Selling of mutual fund units after holding for 3 years falls in the category of long term but unlike equity mutual funds, the benefit of exemption under section 10(38) is not available in debt mutual fund. Any long term gain arises from the sell/redemption of debt mutual funds shall be taxable at the flat rate of 20% (plus 3% cess) after claiming benefit of Indexation.

Note for NRIs – NRIs will receive their redemption amount only after tax:

  • Short Term – 30% TDS + 3% Cess
  • Long Term – 20% TDS + 3% Cess

Taxation of Dividend paying Mutual Funds

Tax on dividend paying Equity Mutual Funds:

The dividend received in hands of unit holder for an equity mutual fund is completely tax free. The dividend is also tax free to the mutual fund house. This means, the fund house is also not liable to pay any tax on the dividend received. Thus for equity mutual fund, dividend is tax free for both—unit holder and fund house.

Tax on dividend paying Debt Mutual Funds:

The dividend income received by a unit holder on his debt mutual fund is also tax free. But, the mutual fund company has to pay a dividend distribution tax (DDT) before distributing this income to its investors.

Here's a broad summary table of the information covered in the article above.

Type of Mutual Fund Definition of Short term & Long term Short term Cap gain Treatment Long term Cap gain Treatment Dividend Distribution Tax (DDT)(paid by MF house/company)
Equity Mutual Funds Less than 365 days is Short Term. 15% taxation under section 111A Nil (Exemption under section 10(38) Nil (No DDT Payable as per section 115R)
365 days or more is Long Term.
Debt Mutual Funds(non Liquid schemes) Less than 3 years is Short Term. Taxed as per individual tax slab of the investor 10% without indexation OR20% with indexation, plus 3% cess 12.5% plus 5% surcharge plus 3% cess, totally 13.519%(under section 115R)
3 years or more is Long Term.
Money Market and Liquid Schemes Less than 365 days is Short Term. Taxed as per individual tax slab of the investor 10% without indexation OR 20% with indexation, plus 3% cess 25% plus 5% surcharge plus 3% cess, totally 27.038%
365 days or more is Long Term.
Gold ETFs Same as Debt Mutual Funds Same as Debt Mutual Funds Same as Debt Mutual Funds Same as Debt Mutual Funds

It is important to have an understanding of DDT, as it is investors who have to bear burden of such taxes.

Rates of DDT on Debt Mutual Fund are as follows:

For an individual / HUF and NRI, DDT is 13.519% (12.5% + 5% surcharge + 3% cess).

DDT for money market & liquid MF

A liquid / Money Market scheme attract more DDT than a normal debt MF, and are taxed at the rate 25 % plus surcharge (5%) and education cess (3%), which effectively amounts to 27.038%.

Type of scheme Rate of DDT for individuals, HUF & NRI
Equity oriented MF schemes Nil
Debt schemes 13.519%
Liquid / money market schemes 27.038

In addition to DDT, a scheme also pays securities transaction tax at the applicable rates (0.1% for FY12-13) at the time of buying and selling equity shares or derivatives on the recognized stock exchange

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. IDFC Tax Advantage (ELSS) Fund

4. ICICI Prudential Long Term Equity Fund

5. Religare Tax Plan

6. Franklin India TaxShield

7. DSP BlackRock Tax Saver Fund

8. Birla Sun Life Tax Relief 96

9. Reliance Tax Saver (ELSS) Fund

10. HDFC TaxSaver

Invest Rs 1,50,000 and Save Tax under Section 80C. Get Good Returns by Investing in ELSS Mutual Funds Online

Invest in Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

Popular posts from this blog

Birla SunLife Manufacturing Equity Fund

The Make in India program was launched by Prime Minister Naredra Modi in September 2014 as part of a wider set of nation-building initiatives. It was devised to transform India into a global design and manufacturing hub. The primary motive of the campaign is to encourage multinational as well domestic companies to manufacture their products in India. This would create more job opportunities, bring high-quality standards and attract capital along with technological investment to bring more foreign direct investment (FDI) in the country.   Why India as the next manufacturing destination?   The rising demand in India along with the multinational's desire to diversify their production to include low-cost plants in countries other than China, can help India's manufacturing sector to grow and create millions of jobs. In the words of our Honourable Prime Minister- Mr. Narendra Modi, India offers the 3 'Ds' for business to thrive— democracy,...

Total Returns Index brings out real Equity Funds Performers

From February, equity mutual funds have to change their benchmarks to account for dividend payments. Until now, funds used price-based benchmarks alone. TRI or total return indices assume that dividend payouts are reinvested back into the index. What this does is lift the overall index returns, because dividends get compounded. For example, the Sensex TRI index will consider dividend payouts of its constituent companies while the Nifty50 TRI index will consider dividends of its constituents. Using TRI indices as benchmarks comes on the argument that an equity funds earn dividends on the stocks in its portfolio, which they use to buy more stocks. Therefore, using an index that also considers dividend reinvestment would be a more appropriate benchmark. Shrinking outperformance With a stiffer benchmark, it is obvious that the margin by which an equity fund outperforms the benchmark would shrink. Rolling one-year returns from 2013 onwards, the average margin by which largecap funds out...

Kisan Vikas Patra - KVP

  Kisan Vikas Patra (KVP) First launched in 1988, the Kisan Vikas Patra (KVP) is one of the premier and popular saving scheme offering from the Indian Postal Department. This product has had a very chequered history- initially successful, deemed a product that could be misused and thus terminated in 2011, followed by a triumphant return to prominence and popular consumption in 2014. The salient features of KVP are as follows- The grand USP- Money invested by the applicant doubles in 100 months (8 years, 4 months). KVPs are available in the following denominations- Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum purchase value for the KVP is Rs.1000. There is no maximum limit. KVPs are available at all departmental post offices across India. These certificates can be prematurely encashed after 2 ½ years from the point of issue. KVPs can be transferred from one individual to another and from one post office to another. ----------------------------------------------------- Inve...

Mutual Fund Review: Reliance Regular Savings Equity

    Despite high churn, Reliance Regular Savings Equity has managed to fetch good returns   In its short history, this one has made its mark. Though its annual and trailing returns are amazing, the fund started off on a lousy note (last two quarters of 2005). It managed to impress in 2006 and was turning out to be pretty average in 2007, till Omprakash Kuckian took over in November 2007 and wasted no time in changing the complexion of the portfolio. Exposure to Construction shot up to 28 per cent with almost 21 per cent cornered by Pratibha Industries and Madhucon Projects . Exposure to Engineering was yanked up (18.50%) while Financial Services lost its prime slot (dropped to 6.69%) and Auto was dumped. That quarter (December 2007), he delivered 54.66 per cent (category average: 25.70%).   When the market collapsed in 2008, thankfully the fund did not plummet abysmally. But even its high cash allocations could not cushion the fall which hovered around the category average. ...

Health for Wealth - How to buy Health Insurance ?

Tax Saving Mutual Funds Online Current open Infra Bond Application form   HEALTH insurance is a relatively new phenomenon in India. Hence, it is not on the top of the mind for most people to make a conscious commitment towards health insurance. However, it is imperative for each one of us to plan for better health for our families and ourselves. There's no better way than to start with making health your top priority this year. So, your health insurance resolution charter would look something like: ■ Invest in health for wealth: Timely investment in health insurance can help build a security net and hedge sudden dilution of another financial asset class in the event of a health emergency, making it imperative to opt for a comprehensive health insurance plan. ■ Buy a comprehensive health cover that fu lfills your health needs for life: Buy a personal health insurance cover even if you have an employee cover because 'employer provided' health insuranc...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now