Tax on Equity and Debt Mutual Funds

How are Mutual Funds Taxed?

How are Mutual Funds Taxed?

Equity Mutual Funds are one of the best investments to generate wealth in the long run while Debt mutual funds are more suited to park money for the short term (as an alternative to fixed deposits). But as in case of any investment, the final returns are determined on the way these Mutual Funds are taxed. This post discusses the taxation on mutual funds.

Types of Mutual Funds:

For Taxation purpose the Mutual Funds can be divided into Two categories:

  1. Equity Mutual Funds – Schemes investing more than 65% of its assets in shares of Indian Listed companies
  2. Non Equity Mutual Funds – All other Schemes which do not qualify as Equity Funds by above definition. This includes Debt Funds, International Funds of Funds, Gold Funds, Monthly Income Plans (MIP) etc

Also Read: Should you invest in Child Plans from Mutual Funds?

Short Term Vs Long Term Capital Gains:

The gains that are generated on redeeming the Mutual Fund units can be classified as Short Term or Long Term Capital Gains depending on period of holding.

Short Term Capital Gains:

For Equity Funds – if redeemed within 1 Year of Investment while for Non-equity Funds if redeemed with 3 Years of Investment [Changed in Budget 2014]

Long Term Capital Gains:

For Equity Funds – if redeemed after 1 Year of Investment while for Non-equity Funds if redeemed after 3 Years of Investment

Free Download: Tax Planning Guide for FY 2016-17

Capital Gains Tax on Mutual Funds:

The info-graphic below shows the tax on Mutual Funds:

Tax on Equity and Debt Mutual Funds in India

Tax on Equity and Debt Mutual Funds in India

STT on Mutual Funds:

In addition to above there is 0.25% Securities Transaction Tax (STT) is levied on redemption of Equity Mutual Funds irrespective of the holding period

There is no STT for non-Equity mutual Funds

Also Read:  Best Tax Saving Investments u/s 80C

Dividend Distribution Tax on Mutual Funds:

In addition to the above capital gains tax and STT there is Dividend Distribution Tax (DDT) which is paid directly by Mutual Funds. The dividend paid to investor is after the deduction of DDT and so the dividend received is Tax Free in the hands of investors. The rates of DDT are as follows:

Mutual Fund – Dividend Distribution Tax

Mutual Fund – Dividend Distribution Tax (After June 1, 2013)

Budget 2014 has slightly change in the way DDT is calculated for Mutual Funds.

Wealth Tax on Mutual Funds:

There is no Wealth Tax on Mutual Fund Investments

TDS on Mutual Funds:

There is no TDS (tax Deduction at Source) for Domestic Investors on redeeming any Mutual Fund.
However NRI investors are subjected to TDS as follows:

Mutual Fund - TDS for NRIs

Mutual Fund – TDS for NRIs

I hope this post makes the Taxation on Mutual Funds clear!

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