Mutual Funds Tax Treatment: Tax Deduction, Capital Gain & Dividends

As we all know that money is a very important part of our life, so that’s why it become compulsion for everyone to take the right decision regarding the investment that where to invest the money and where not to invest.

Now in this article we all are going to discuss briefly about the tax implication under the Mutual Fund. Here you will get all your queries solved like are mutual funds taxable or not, tax exemption on mutual funds, mutual funds dividend tax treatment and more.

During the time of the investment, people become very conservative about their money and this consciousness is also truly right. But we all use to ignore the implication of taxability as by taking it in consideration we all may change our decision or thinking.

For Example; Mrs.A is a lady who was in excess of money so she got an idea to invest that money. But the problem with her was that she herself was not sure that where she should invest it whether in F.D or in Mutual Funds and she use to thought that all the interest earning from deposits will engage an income tax of 10% whereas she was not sure about the tax signification on the Mutual Funds. So that is why she wants to understand the tax structure for her investments.

There are two types of mutual funds as follows. Here you will get the complete tax treatment on both equity oriented and debt oriented mutual funds.

  • Equity oriented
  • Debt oriented

Tax Implications on Equity Mutual Funds

The funds which has 65% part of domestic equity shares on an average treated as equity funds. Equity oriented balance funds are also treated as equity funds. Maximum part of the money is invested in the stock market which is being generally collected from the common public for equity mutual funds.

Holding Period

  • Holding over 12 months treated as long term holding
  • Holding less than 12 months treated as short term holding

Tax on Equity Mutual Funds

  • Long Term Capital Gains – No Tax
  • Short Term Capital Gains – 15%
  • Securities Transaction Tax – 0.001% (1 Paise for every Rs.1000)
  • Dividends on Equity Funds – Exempt from Tax

Tax Implications on Debt Mutual Funds

Government Bonds, RBI Bonds and other greatly introduced securities are the fixed income receipt investments in which Debt mutual funds invests. Generally, Debt agreement has a fixed time period and a person had to pay of fixed rate of return on the Debt.

Holding Period

  • Holding over 36 months treated as long term holding
  • Holding less than 36 months treated as short term holding

Tax treatment on Debt Mutual Funds

  • Short term Capital Gains – Taxed at slab rate (if you are in 10% tax bracket then tax will be levied 10%, if you are in 20% tax bracket then tax will be levied 20%) (Check here Income Tax Slab)
  • Long term Capital Gains – 20% tax with cost indexation benefits (check the complete detail about indexed cost of acquisition here)
  • Dividends: Dividend Distribution Tax (DDT) (AMS deduct it from NAV, so you receive dividend after deduction of DDT) – 28.84% (including surcharge and cess)

Tax Deductions on Mutual Funds

  • Investment in certain specified LIC Mutual Funds is eligible for deduction u/s 80C.
  • Investment in Pension funds of specified mutual funds will be eligible for deduction u/s 80C.
  • Investment in equity linked saving scheme of UTI and other mutual funds, will be eligible for deduction u/s 80C.
  • Investment in units of mutual funds that invests the amount of subscription in eligible issue of capital, will be eligible for deduction u/s 80C.

Know more about deduction under section 80C

Conclusion

Mutual funds are better in terms of payment of tax i.e. tax is to be paid less but only in case these are kept for long period of time. And Moreover, the individuals which in tax bracket of 30% should go for Mutual Funds.

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