How Mutual Funds are Taxed

Planning to invest in mutual funds(MF)? Excellent choice! But, without taking tax into consideration? Since taxation will affect your cash flow, knowing the ins-and-outs of it becomes imperative. This guide will teach you all you need to know about the taxation angle of MFs.

Understanding how mutual funds are taxed

Amendments made to the Union Budget 2020 have made any MF scheme taxable in a classical manner. Meaning, the dividends investors receive are added to their taxable income and then taxed as per their respective income tax slab rates.

However, the taxation of MFs depends upon the fund type and the holding period. The short-term and long-term capital gains are taxed at different rates.

Taxation of equity funds capital gains

Short-term capital gains on equity funds within a 1-year holding period are taxed at a flat rate of 15%, regardless of your income tax slab. Long-term capital gains (LTCG) up to Rs. 1 lakh are non-taxable. Anything exceeding this amount attracts an LTCG tax at the rate of 10% (without indexation).

Additional Read: 5 Tips to grow your wealth while saving taxes

Taxation of debt funds capital gains

Short-term capital gains on debt funds within a three-year holding period are taxed in a classical manner. Furthermore, a flat rate of 20% after indexation is taxable on long-term capital gains. Plus, applicable cess and surcharges are also levied on the tax.

Taxation of hybrid funds capital gains

Taxation of hybrid funds capital gains depends upon the equity exposure of the portfolio. If over 65% of the funds’ assets are invested in equity funds, then the taxation rules of equity funds apply.

Similarly, if the hybrid fund is a debt-oriented fund, the taxation rules of a debt fund apply.

Taxation of capital gains received from SIP investment

For investment through SIPs, you need not pay any tax on long-term capital gains less than Rs. 1 lakh. However, short-term capital gains are taxable at a flat rate of 15%, irrespective of your income tax bracket. Cess and surcharges will also apply.

The first step to calculating MF taxation is finding out the capital gains. Here’s how to calculate capital gains on mutual funds -

Buying price of the fund – selling price of the fund = capital gains

How to calculate long-term capital gains on mutual funds

To calculate long-term capital gains, use the following formula –

Full value of accrued or received consideration – (indexed cost of acquisition + indexed cost of improvement + cost of transfer)

How to show mutual fund in Income Tax Return

If you are a salaried individual, you need to file ITR-2 and if your income source is your business, you need to file ITR-3. You will be required to disclose details such as date of sale and purchase, sales consideration, purchase amount, among others.

Additional Read: ELSS: Wealth Creation Analysis

Over to you

Finally, mutual fund units become more tax-efficient the longer you hold onto them. However, do you have a different investment horizon in mind? Based on your investment goals, risk profile, and more requirements, you can compare MF schemes from the comfort of your home using Tata Capital’s Moneyfy app. Start investing today!