You invest a fixed sum of money in a scheme either every month or quarter under the debt mutual funds or equity mutual funds. At the time of investing in a particular mutual fund, the first thing that you need to access its returns is to know the entire process of how it will be taxed. The post-tax returns will matter a lot. This article focuses on the tax benefits of the mutual fund.
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The first and foremost thing is to consider the capital gain tax on mutual funds. The value of appreciation in your asset is known as the capital gain. For example, if you have brought something for Rs. 4 lakh and sell it for Rs. 4.5 lakh then the capital gain will be of Rs.50000. It is divided further into short term and long term which depends on the period of holding of assets.
Short-term capital gain is the gain when the investment held is less than 1 year or in other words sold before the completion of 1 year. Long-term capital gain is the gain when an investment is sold after 1 year. Mutual Funds Capital Gain Tax usually depends on the type of fund, whether it is equity or debt.
According to chapter XII-E of Income Tax Act 1961 (ITA), Equity oriented Mutual Funds are described as the mutual funds where equity is more than 65% of the total portfolio and which has been set up under the scheme of a mutual fund specified as per section 10 (23D) of ITA.
Mutual funds that are invested in other funds and international funds will be kept under the category of debt for tax purposes. This article will further examine the tax issues in the hands of investors investing in mutual funds in- dividends, long-term capital gains, and short-term capital gains.
Mutual fund(MF) and Equity-linked savings scheme (ELSS): Subscription to Tax Saver MFs and ELSS qualifies for deduction under Section 80C. Investment in ELSS has a lock-in period of 3 years. Pre-mature withdrawals are restricted under any circumstance.
As per section 10(35) (a) of ITA, “Any income received in respect of the units of mutual funds specified u/s 10 (23D) of ITA is exempt from tax. The outcome of this provision is the dividend received from equity mutual funds is exempt from tax. By the virtue of provision to section 115 (R) (1) of ITA, equity-oriented schemes are now subjected to dividend distribution tax (DDT) (wef A.Y. 2019-20). Now, DDT has to be paid in the case of non-equity oriented schemes as well as equity-oriented schemes.
Tax Benefits of Long Term and Short Term Capital Gains from Mutual Funds Units
Tax benefits of long and short term capital gains from mutual funds units are given below:
Under Long-term capital gain on Equity Mutual Funds, if you buy and hold an equity Mutual Fund for more than 1 year, there will be NIL Tax. E.g. If you invest Rs. 1 lakh in any fund and after 1 year, its value is Rs. 1.3 lakh then there will be zero tax on the capital appreciation of Rs. 30000. This is one of the great tax benefits of equity mutual funds.
Moreover, as per the new section 112A via the Finance Act 2018, if in case, the amount of long-term capital gain exceeds Rs. 100000 then the amount over Rs. 100000 shall be chargeable to tax @ 10% without indexation. However, section 112A is subjected to certain conditions, one of them being the transfer should have taken place on or after 1st April 2018.
Under Short Term Capital gain on Equity Mutual Funds, if you sell equity mutual funds before the completion of 1 year then you require to pay the tax of 15% on capital gains. Out of the above example, where the gain was Rs. 30000 is an example of short-term capital gain and investors would have paid Rs. 4500.
In the case of NRIs
The same gain of capital applies to NRIs except for the short-term capital gain where there will be a TDS (tax deducted at source) which means the tax will be deducted by the Mutual fund company before paying redemption (sell) amount. Under HUFs or individuals, whose total income excluding short-term capital gains is below the maximum amount not chargeable to tax then the difference between the current maximum amount not chargeable to tax and total income excluding short-term capital gains must be adjusted from capital gains. Hence, balance STCG will be liable only to income tax at the rate of 15%.
The mutual funds are required to deduct tax at source @ 15%+SC+HEC in respect of short-term capital gains arising to non-resident individual unitholders in case of equity funds but @ 30% (SC+HEC) in case of non- equity schemes.
Capital Gain Tax on Debt Mutual Funds
Any short-term capital gain that arises due to the selling of debt fund before 36 months will be added to the investor’s income in case of a short-term capital gain on debt mutual funds. Therefore, once it is added to income it will be taxed according to the tax slab of that individual.
20% shall be taxed with indexation under Long-term capital gain on debt mutual funds. NRIs will get redemption amount only after paying TDS on capital gains;
Short Term – 30% TDS
Long Term – 20% TDS
A Health and education cess of 4% will also be applied to this TDS.
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