eMoneyIndeed Make Money Online
As you might already know, mutual funds are considered to be more tax efficient investment options as compared to other investment instruments. Investing in mutual funds will give you many benefits.
If you want to maximize the advantages of this investment, you need to know all the tax saving mutual funds available. But first, you need to first understand how mutual fund taxation works.
So here are some of the key points of mutual fund taxation if you live in India –
Equity vs Non-Equity Funds
Taxation in India is heavily dependent on whether the mutual fund is an equity fund or a non-equity fund. If the proportion of equity holdings is above 65%, then it is declared as an equity fund according to the Income Tax Act.
Read | 10 Top Ways of Making Huge Money by Investing Small
So large cap funds, mid cap funds, arbitrage funds, and sector funds will fall into this category for taxation.
On the other hand, all the funds that aren’t classified as equity funds are automatically classified as non-equity funds.
Capital Gains Taxation
When the sale price is higher than the cost price, the profit received is known as capital gains. When it comes to equity funds, gains are classified as long-term if held for 12 months or more, and short-term if less than that.
These short terms gains are taxed at a rate of 15% plus cess where long-term gains were tax-free prior to April 2018. The budget saw a revision and now long-term gains are also taxed. All these long-term gains are taxed at 10% if the gain is over ₹1 lakh. It is a flat rate wherein there is no benefit of indexation.
On the other hand, the taxation of non-equity or debt funds is different. Right from its holding period to taxation, debt funds are differently treated for taxation purposes. The holding tenure for classification between long-term and short-term is 36 months in this case.
Short-term gains here are taxed at the highest applicable slab rate whereas long-term transactions are taxed at a flat rate of 20% with an added benefit of indexation.
Dividend Taxation on Mutual Funds
On the basis of different types of mutual funds, dividends are taxed differently. When it comes to equity funds the dividends are tax free for the mutual fund investor, but after the Budget 2018, the equity funds dividends are subject to dividend distribution tax at 11.64% which reduces the actual dividend received.
And in non-equity funds the DDT is greater at the rate of 29.12% which is nearly as much as peak payable income tax rates. So, it’s a better idea to have a growth plan and a systematic withdrawal plan (SWP) rather than dividend plans of debt fund.
Also See | 8 Biggest Money Mistakes to Avoid in Your 50’s
ELSS Funds Tax Rebate
ELSS tax saving mutual funds are a special category of equity funds that give tax exemptions under Section 80C, with a 3-year lock-in period wherein the funds cannot be withdrawn.
The blanket upper limit under Section 80C is Rs. 1.50 lakhs, including ELSS. So, if you are in the tax bracket of 20% and contribute to ELSS, then you receive a 20% tax break on your contribution.
Carry Forward of Losses
Profits on mutual funds are taxed, however, losses can also be written off against the profits. So, you can set off short-term losses against both long-term and short-term gains, whereas long-term losses can be set off against long-term gains. Unabsorbed losses can be carried forward for 8 assessment year period after the year that the losses occurred.
Wrap Up
Now that you are well informed about the different type of investments available to you and their taxation rates, what are you waiting for? Invest in mutual funds today to meet your financial goals. Happy investing!
Related Articles
Featured Post
