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

What is Electronic Clearing Service (ECS)?

  As the name suggests, it's an electronic process through which money can be transferred from one bank account to another. According to RBI, this mode is usually used for regular payments and receipts, like distribution of dividend, interest, salary, pension etc. This mode is also used for collection of bills for telephone, electricity, water, various types of taxes, payment of EMIs , investments in mutual funds , payment of insurance premium etc. There are two types of ECS , like most other banking transactions, ECS credit and ECS debit. An ECS credit is used by a bank account holder , usually a large company or an institution for services like payment of dividend, in terest, salary, pension etc. If your mutual fund pays you dividend to your bank account, of all probability it is being paid through ECS credit.ECS debit, on the other hand, is used when a company or an institution is getting money from a large number of people. For example if you are investing in a mutual fund sc...

WEALTH TAX

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 WEALTH TAX   WHAT CONSTITUTES WEALTH? For wealth tax purposes, "wealth" means property , urban land, car, jewellery , yacht, boat, aircraft and cash in hand in excess of Rs 50,000. CAUTION POINT | Do not think you will have an easy escape from wealth tax by transferring your `wealth' without consideration to your spouse or minor child. Such assets will also be considered as your wealth. HOW TO DETERMINE YOUR TAXABLE WEALTH Add the taxable value of the above assets (computed as per the detailed rules for valuation) owned by you as on March 31 (for FY 2014-15, it will be March 31, 2015). In case you sold your car during the year, it will not be taxable wealth. Deduct loans if any obtained by you to acquire any of the taxable assets from the value of gross tax out for at least 300 days in a...

Equity Savings Fund

Invest Equity Savings Fund Online   The best part about these funds is that they are subject to equity fund taxation and at the same time are structured like MIP like funds . This new category, equity savings funds , offer a little of everything. They allocate money to equities & equity related instruments, and fixed income. They aim to generate returns by diversification. Such funds invest in fixed income and arbitrage to protect the investors from short term volatility and equity for capital gains. The best part of these funds is that they are subject to equity fund taxation and at the same time are structured like MIP funds.   MIP funds however are subject to debt fund taxation. Investors Equity savings funds are suitable for the following: First time investors who seek partial exposure to equity with less volatility and greater stability Investors seeking moderate capital appreciation with relatively lower risk Those wh...

How to Pick Top Performing Mutual Fund Schemes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   How to Pick Performing Schemes  Funds that continue to stay in the top grade of performance over longer periods are the ones to bet on, advise investment experts   The mutual fund performance charts of the past few months make for an impressive reading. Funds across all categories boast of stellar returns. Sample this: The mid and small cap category has averaged 77 percent return over the past 12 months, with the best fund delivering a staggering 120 percent. The tax-saving funds also average an impressive 51 percent, including a fund which has soared 92 percent. Many of the table-toppers are funds of proven quality and track record. However, there are also schemes that are not that well-known. Some of these have rarely made it to the performance charts in the past, yet, of late, they bo...

8% Government of India Bonds quick guide

For those seeking comfort in safety of returns, the Government of India issued 8% savings bond once again comes to the fore. First launched in 2003, these bonds are issued by the government with a maturity of 6 years. The bonds are available at all times with specified distributors through whom you can apply to invest in them. Here is a quick guide to what the bond offers and its features to ascertain to check for suitability. What are Government of India bonds Government of India bonds are like any other government bonds with specified rate of interest. The rate is fixed at 8% per annum paid half yearly, or you can opt for cumulative payment of interest at the end of the tenure. You can buy these bonds from State Bank of India and its associates, other nationalized banks and some private sector banks such as HDFC Bank Ltd and ICICI Bank Ltd, among others. The bonds can be bought from the offices of Stock Holding Corporation of India as well. They are available in physical form onl...
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