Home / Property / Capital Gain / Income Tax on Mutual funds for Individual Investors (Residents)

Income Tax on Mutual funds for Individual Investors (Residents)

The most confusing aspect is ‘tax on mutual funds’ Actually if we decode the provisions, it’s easy. After reading this article, please leave your comments in the space provided at the end of this page whether you have understood the tax provisions of mutual funds!

 

The Basics

I am not writing about the basics of Mutual fund here. I will write about it in a separate article. So, for the purpose of this article, I presume that the readers have basic knowledge about Mutual Funds (MF).

 

Types of Mutual Funds Broadly there are two types of Mutual Funds

  • Equity Oriented MF
  • Non-Equity Oriented MF

Click here to know Various types of equity and Non equity Fund

Income from Mutual Funds –there are two types of Income

  • Dividend  – (similar to Interest received from bank deposits)
  • Capital Gain – (The sale price minus the purchase price of MF is Capital Gain)

 

Let us examine the tax implications

 

Equity Oriented Mutual Fund

  • Meaning – Equity Oriented MF are defined under Income Tax as those mutual funds where equity holding is more than 65% of the total portfolio of the fund.
  • Income from Dividend – any dividend received by the investor is exempt from Income Tax. However, one has to declare the income while filing Income Tax return. (Section 10(35) of IT Act)
  • Capital Gain (Short Term) – If the investment is sold through stock exchange within 12 months from the date of purchase it will be called as ‘Short term Capital Gain (STCG)’. The short term capital gain on the sale of equity oriented MF is taxed at 15.45%
  • Capital Gain (Long Term) – If the investment is sold after 12 months from the date of purchase it will be called as ‘Long Term Capital Gain (LTCG). The long term capital gain on the sale of equity oriented MF is exempt from tax (Section 10(38) of IT Act). However, one has to declare the income while filing Income Tax return

 

Non-Equity Oriented Mutual Fund

  • Meaning – All funds other than Equity Oriented funds are called as Non-equity oriented funds. It includes debt-oriented funds, Fixed Maturity Fund, Gift Fund, Monthly Income Plan (MIP), Fund of funds and balanced Fund (if the equity portfolio is less than 65%), Gold ETF, etc.
  • Income from Dividend – any dividend received by the investor is exempt from Income Tax. However, one has to declare the income while filing Income Tax return. (Section 10(35) of IT Act)
  • Capital Gain (Short Term) – If the investment is sold through stock exchange within 36 months from the date of purchase it will be called as ‘Short term Capital Gain (STCG)’. The short term capital gain on the sale of non-equity oriented MF is taxed at normal tax slabs as applicable under Income Tax Act.
  • Capital Gain (Long Term) – If the investment is sold after 36 months from the date of purchase it will be called as ‘Long Term Capital Gain (LTCG). The long term capital gain on the sale of non- equity oriented MF is taxed at 20% of capital Gain. (the capital gain means Sale Price minus Indexed cost of Purchase Price)

Other points

  • Shares of Unlisted Companies (means sale of shares of closely held limited and private limited companies which are not listed in the stock exchange) – if the period of holding is less than 36 months, it is called as Short Term Capital Gain and the gain is taxable at normal slab rates. If the shares are sold after 36 months from the date of purchase, it is called as Long Term Capital Gain (LTCG) and taxed at 20% of capital gain. (the capital gain means Sale Price minus Indexed cost of Purchase Price)
  • In case of Systematic Investment Plan (SIP) at the time of redemption, the cost of acquisition and period of holding of units shall be determined on the basis of First in First out (FIFO) method.
  • ETF (Exchange Traded Fund) is considered as Equity if the underlying security is domestic Equity, otherwise it is classified as debt oriented fund for tax purposes.

 

Contact us now

About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]