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Mutual Funds – Taxation Aspects

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In this post, I will explain the Taxation aspects of Income / Returns from Mutual Funds.

The taxation depends on type of Mutual fund scheme you have invested in.  The taxation will be different for equity schemes, and non equity schemes ( for e.g debt schemes, money market etc)

Broadly, there can be following 2 type of Income from Mutual Funds:

  1. Dividend
  2. Capital Gains

A. Dividend Received  – Tax Free in hands of investor

Any dividend received from Mutual Funds is exempt from Tax in hands of investor. So , if you have selected Dividend Option while investing in MF, then any dividend received is tax free for you.

Actually, the interest on such dividend is already paid by Mutual fund company via Dividend Distribution Tax (DDT) . Paying such tax impact returns of your MF scheme.

DDT – in case of Equity schemes is NIL

DDT – in case of Non – Equity schemes is 25%

 

B. Long Term Capital Gains

When you sell your Mutual Funds units at Higher NAV than purchase cost, you make a profit (Capital Gain) and you need to pay tax on such income based on type of mutual fund and your holding period.

If you sell the MF Units after holding for 12 months, there will be Long term capital Gains (LTCG).

LTCG for Equity schemes – NIL

LTCG for Non – Equity schemes – 10% without indexation & 20% with Indexation

UPDATE : Budget 2014-2015 – It is proposed to increase the LTCG tax from 10% to 20% and holding period from 12 months to 36 months.(This will make Debt funds less attractive form taxation pojnt of view. Read Details 

B. Short Term Capital Gains

If you sell the MF Units before holding for 12 months, there will be Short term capital Gains (STCG).

STCG for Equity schemes – 15%

LTCG for Non – Equity schemes –  As per the tax slab of Investor

  Equity Funds Non Equity Funds
Dividend Received (in Hands of Investor)  Tax FREE Tax FREE
Dividend Distribution Tax (Payable by MF Company) NIL 25%
Long term Capital Gains NIL 10 % without indexation or 20% with Indexation whichever is lower
Short term Capital Gains 15% As per tax slab of investor
(upto 30%)
  • Surcharge at the rate of 10% of Tax amount shall be levied in case of individual / HUF unit holders where their income exceeds Rs 1 crore
  • Cess @ 3% of tax amount

UPDATE : Budget 2014-2015 – It is proposed to increase the LTCG tax from 10% to 20% and holding period from 12 months to 36 months.(This will make Debt funds less attractive form taxation pojnt of view.  Read Details

 

Summary

For Equity Mutual funds

  • Dividend received is Tax free in hands of Investors
  • no DDT for Equity Mutual funds dividend
  • no Long term capital gain tax

Taxation on Mutual funds is very important parameter to consider while evaluating mutual funds as investment option. Also, it is an important factor while selecting type of mutual fund scheme.

Depending on your tax slab, you need to choose Mutual fund Scheme Options like Dividend or Growth etc.

Feel free to comment or ask your query in the Comment Box below.

If you have any queries related to this article or any other personal finance query ( Investment, Taxation etc), please comment below

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The author is a Chartered Accountant and loves to write about Personal Finance, Wealth Management, Taxation etc. Disclaimer - The articles on this website is for informational and knowledge purposes and should not be treated as financial advice, Please consult your financial advisor before taking any investment decision.

31 comments

  1. hello
    can you tell me that interest earned on part withdrawal from debt fund is taxable.
    e.g if i invest 50,000 in 1 jan 2014
    and 25000 withdraw in 31 march 2014 from above amount
    3 month interest earned on 25000 rs is taxable as per current slab rate
    or interest is taxable when full amount is withdraw from debt fund
    pls reply

    • Hi Amit,

      There is no interest paid in Debt Funds. You can either choose Dividend Option or Growth Option.

      1) Dividend option – You will get dividend if declared by MF company. There is no Gaurantee that they will declare dividend in next few months
      2) Growth Option – You can sell units in the market to get the profit.

      Depending on the option, the profit will be taxable.

  2. i have invested in growth option

  3. please reply

    • If you have invested in Growth Option, then you will have only Capital Gain tax when you sell the MF units

      Long term Capital Gains – 10 % without indexation or 20% with Indexation whichever is lower
      Short term Capital Gains (if sold before 1 year) – As per tax slab of investor (upto 30%)

  4. THANKS FOR YOUR REPLY

    IF I WITHDRAW PRINCIPAL AMOUNT NOT INTEREST
    THEN INTEREST IS TAXABLE OR NOT
    EXAMPLE GIVEN IN 1ST QUERY.

    • Hi Amit, As I said there is no separate principal & interest in Debt Funds. Your NAV of Mutual Fund will increase / decrease.

  5. please reply this question.

    I invest 20000.00 in debt MF (growth option) and after 6 month market value is 21000.00
    and i withdraw only 20000.00 after 6 month
    kindly tell the taxable amount.

    • Hi Amit,
      Let me help to explain

      1) If you invest Rs 20000 in Debt fund, you will be allocated units @ that day NAV. For e.g. 2000 units @ 10
      2) After 6 months market value of your fund is Rs 21000 i.e NAV increased to 10.50 (2000 X 10.5 = 21000)
      3) now if you sold Rs 20000 ( at current NAV of 10.50 , you need to sell 1905 units = 1905*10.50 =20000)

      4) So your profit on 1905 units will be 1905 ( 10.5-10) = 952 . So you will have short term capital gain of Rs 952.

      5) Youw will still have 95 units of Debt fund balance

  6. thanks for the reply

  7. I had invested rs 10000(4890.263 units@20.4488) on 15-11-2011 in liquid fund.Redeemed half of it on 28/12/2012.Rest made swp of 5000/- in balanced fund on 5 every month from april 2013 to nov 2013.Please advise inflated cost and long term loss to incorporate in returns.secondly advise in which column in Capital gain sheet of ITR2 need to fill the same.

  8. Sir,
    I have invested Rs. 150000/- in debt mutual funds growth option in Jan 2013 and in August 2014 I have started Systematic Transfer Plan in Equity Mutual fund @ Rs. 5000/ per month whether it will invite tax implications.

    • Yes, when you start STP, that will be treated as withdrawals from Debt fund. So the taxation aspects of Capital gains for debt funds will apply.

  9. Hi Vivek,

    Kindly go through & clarify my queries, Thanks in advance.

    Its been 2hrs started reading your posts one by one about MF, from mutual funds basics, investments, Tax saving etc., I decided to invest in mutual funds after your posts, I have been thinking for over a over but lack of sufficient info or surplus unrealistic advantages on MF from agents I couldn’t decide myself to start with but Now I have sufficient knowledge on mutual funds to invest on MF but still I need real, faithful expert advise like you to invest in mutual funds for longer periods.
    Below are my concerns and plans on MF? Please advise me.

    1. I am planning to invest 5k on ELSS schemes for longer term of 15years, selected top 2 from your ELSS list, 2.5k each (Axis long term equity fund(G) & icici pru right fund(G)) don’t want to take risk in investing all balls in one basket. This is for tax saving , Hope these should be fine or suggest me if something else is possible?

    2. This is for short term returns (non tax saving) for a period of around 5+ years. please suggest whether to go for small cap or mid caps or any other mutual funds equity plans? Please suggest the few names too.

    3. Need your suggestion on this, Need to invest for long term say around 15 years +-2Years.
    Is there any MF which is tax exempted on capital gains, As this is Long term investment Our investments will increase as well as the capital gains.,
    is the capital Gains falls under tax slabs of 5lakhs, 10lakhs and all. where we need to pay 30% if we annual income crosses 10 LPA etc..,

    I am planning to take SBI Blue chip fund & HDFC Top 200, 2.5k SIP each.

    could you please discuss something about this as I didn’t understood clearly about this article? Taxation on Capital Gains of Mutual funds or Caps?

    I am planning to invest SIP for all the above investments. but can we change the SIP amount as needed let say 3 years later my salary may up by 50% and I need to increase investment on all these by 50% or market is highly volatile and I want to reduce my SIP amount for couple of months etc…, Can we have full control on SIP basically?

    Can we invest lump sum amount at anytime, say when NAV is relatively low comparatively?

    Thanks in advance for spending your time in reading the full message and for your advise on the same.

    Please reply !!!!

    • Hi Vivek, Kindly pls reply !!!

    • Thanks Kiran for finding it useful.

      1. ELSS funds are good for tax saving. It is right approach to put money in 2 funds, the funds selected by you are performing well and you can consider these for investment

      2. For 5-7 years, it is better to invest in Large cap or diversified equity funds. However, you can also add mid/small cap as well. Some best funds are given below

      http://wealth18.com/best-mutual-funds-to-invest-in-2014-top-performing-mutual-funds-in-india/

      3. All equity funds are exempted from Capital gains if you hold it for atleast 1 year. Any capital gain (for equities) above 1 year is called Long term capital gain & it is exempt for Equity funds.

      4. You have full control over SIP duration & amount. You can increase whenever you want & you can decrease amount when you want. No restrictions.

      5. You can also invest in lump-sum any time.

      Feel free to ask if you have more queries.

      • Hello Vivek,

        Your reply and blogs are really useful. I am NRI, I am 29 Yrs old. Just planning to start investing in MF fund through SIP.

        As I am NRI do I need to invest on ELSS Tax saving fund. As you might know the Money we get are tax free in our NRE acct.

        I am also looking to form Portfolio with investment for long term about 15- 20 years. One portfolio for short term about 5 to 7 years. Smaller portfolio will be aggressive. While as longer one will growth.

        Please help me to select best fund accordingly. Thanks

        • Hi Mayank,

          1) ELSS funds qualify for 80C deduction but if you have no income is India, then that is not very useful. You can go with normal funds.

          2) For long term you should choose aggressive funds (which carries higher risk). you can consider the following funds

          Birla Sun Life MNC Fund (G)
          SBI Small & Midcap Fund (G)
          Can Robeco Emerg-Equities (G)
          Reliance Pharma Fund (G)

          3) Form medium term, you can consider:
          UTI Equity Fund (G)
          ICICI Pru Focused Bluechip Eqty (G)
          UTI MNC Fund (G)
          Reliance Equity Oppor – RP (G)

  10. Thank u soo much Mr Vivek for such a useful info for investor/ beginer lyk us. Apart from info in the article, i find comment nd reply section equally rather more informative.
    Thank you once again….

  11. Dear Vivek,
    “Whenever I’ll sell my equity based MF (after 12M holding) my income will be tax free” understood. But my question is, while filing the ITR shall I need to disclose this earnings? If required to disclose – which amount – the total earning or only the profit earned (capital gained) ? and in which column shall I enter the amount ?

    What if I gain ‘net loss’ on selling said equity-MF, shall I be entitled for deduction of such loss from income in that year? If yes, how to avail the same (the overall set of questions remains similar as in case of ‘gain’ as above).

    Thanks in advance (as you’ve responded all my queries till now with “acceptable delay”)

    • Long temr capital gain on Equity funds has NIL taxation. You need to show that amount in point 3 of Schedule E1 (ITR 2). Only the profit earned needs to be shown there.

      Long term capital loss can only be set off against the long term capital gain. It cannot be set off agaisnt other income.

      • Thanks Vivek for the reply but sorry to say that the doubt still stands uncleared

        Because when I’m filing e-return at https://incometaxindiaefiling.gov.in/ I’m offered only two options ITR-1 and ITR-4S. What to do in this circumstances?

        I shall have my Salaried income too along with the capital gain.

        And the other doubt still unclear is, whether is it mandatory to declare this ‘Nil Taxation income’ in my IT-return or is it optional (at least up to certain limit)? What would be the ‘pros and cos’ of either act – declaring or not-declaring ‘Nil Taxation Income’?

        [I’d filed last year’s return online with salaried income; and ‘FY14-15’ would be my 2nd IT return]

        (other two comments may be removed as were posted due to some technical errors.)

        • Hi Amit,

          For FY 2014-2015 (AY 2015-2016), the Income tax forms are not yet finalized. A set of returns was issued earlier this month but put on hold as it required lot of information. The new forms should be released by end of this month.

          It is mandatory to declare the Exempt income otherwise they may be inconsistency if the income tax department is running some analysis. For e.g. if you have large deposits, and less income (as most of it was exempt), they may raise query. So it is better to disclose the exempt income as there is no harm.

          • Thank you very much Vivek for the clarity and information. And a very special thanks for the ‘express response’ of this last query.

            I’m really grateful to you as after reading to your posts and gaining knowledge from them, as well the responses from you of the queries of mine and that of others, I’ve acquired enough of awareness that I’ve started investing small amount in MFs (SIP) and looking to invest more in future (of course for ‘long term’ as you suggest almost always)

            I shall be looking this space for more updates regarding investments and taxation and esp. regarding the upcoming set of ITR forms, as I’m sure you’ll be posting in the matter as soon as it surfaces.

            Thanks again.

          • Thanks Amit for finding it useful.

            Once the new ITR forms are finalized, I will share the details as well.

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