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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%

 

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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

 

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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.

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