Taxation on Equity Mutual funds

Mutual fund, is a sensible, reliable investment arena. Yet, it is also equally important understand its tax implications. For example, one can earn two types of income from a mutual fund investment- a dividend and a capital gain/loss at the time of sale. Both have different tax implications. The taxes levied also depend on the type of scheme, equity or non-equity, and the investment duration.

Income-tax rules demand that the mutual fund schemes be grouped into equity-oriented mutual funds and non equity-oriented mutual fund schemes. Equity-oriented mutual fund schemes are mutual fund schemes that buy stock for at least 65% or more of their net assets in listed equity securities of domestic companies. All other mutual fund schemes may be listed in categories other than equity-oriented mutual fund schemes, including debt funds, gold funds, etc.

The rate of tax of capital gains on mutual funds depends on the holding period and type of mutual fund. The holding period is the span for which an investor keeps the mutual fund units. In easy terms, the holding period is the time between the date of the purchase and sale of mutual fund units. The holding period of equity mutual fund can be short term or long term. Short term is less than 12 months and the long term is more than 12 months.

Short Term Capital Gain (STCG): The gains from equity mutual fund redeemed before 12 months are treated as short term capital gain and taxed at 15% + surcharge as applicable and cess.

Long Term Capital Gain (LTCG): Gains on equity mutual fund held for more than 12 months are treated as Long Term Capital Gain (LTCG). Long Term Capital Gains up to Rs.1 lakh are tax free. LTCG in excess of Rs.1 lakh is taxed at 10% + surcharge as applicable and cess.

If one invests in a mutual fund with a dividend payout option, one will get scheduled payments in the form of dividends. Dividends would be added to your income and taxed according to your income tax slab .

Mutual fund tax benefits under Section 80C: Investments in Equity Linked Savings Schemes or ELSS mutual funds qualify for deduction from the taxable income under Section 80C of the Income Tax Act 1961. The maximum investment amount qualifying for tax deduction under Section 80C, is Rs 1.5 lakhs. Investors falling under the highest tax bracket (30%) can thus hold up to Rs 46,350 in taxes (Rs 1.5 lakhs X 30.9% tax + cess) by investing in ELSS mutual fund schemes. As an investor, one should take note that, Rs 1.5 lakhs is the blanket 80C cap, including all qualifying items like employee provident fund (EPF) contribution (deducted by the employer), PPF, life insurance premiums, NSC and ELSS mutual funds etc.

Equity mutual fund taxation may sound difficult at first, but it can help reach one’s financial goals with careful planning. Holding funds for a longer period makes them more tax-efficient. Equity funds are perfect if you are looking for comparatively less risky investments that are safe from market volatilities.