Tax on Equity and Debt Mutual Funds [for FY 2018-19]

Equity Mutual Funds are one of the best investments to generate wealth in the long run while Debt mutual funds are more suited to park money for the short term (as an alternative to fixed deposits). But as in case of any investment, the final returns are determined on the way these Mutual Funds are taxed. This post discusses the taxation on mutual funds with changes in Budget 2018.

Types of Mutual Funds:

For Taxation purpose the Mutual Funds can be divided into Two categories:

  1. Equity Mutual Funds – Schemes investing more than 65% of its assets in shares of Indian Listed companies
  2. Non Equity Mutual Funds – All other Schemes which do not qualify as Equity Funds by above definition. This includes Debt Funds, International Funds of Funds, Gold Funds, Monthly Income Plans (MIP) etc

Also Read: 23 most common Investments and how they are Taxed?

Capital Gains Tax on Mutual Funds:

From tax perspective the tax on mutual funds fall under “Income from Capital Gains”. This would be useful information when you have to decide which ITR Form to use to file income tax returns.

The gains that are generated on redeeming the Mutual Fund units can be classified as Short Term or Long Term Capital Gains depending on period of holding which is different in case of equity Vs non-equity mutual Fund. We cover both types of funds one by one.

Equity Mutual Fund:

Long Term Capital Gains/Losses: If the redemption of mutual fund happens after 1 year of investment, the gains or losses are classified as long term capital gains/losses in case of equity mutual fund.

Short Term Capital Gains/Losses: If the redemption of mutual fund happens with-in 1 year of investment, the gains or losses are classified as short term capital gains/losses in case of equity mutual fund.

The tax treatment on both types of capital gains are different.

Starting April 1, 2018 Long Term Capital Gains of more than Rs 1 Lakh would be taxed at the rate of 10.4% (including cess). This was introduced in Budget 2018. Until last financial year (FY 2016-17) the long term capital gains from equity funds were tax free.

There is NO complication in calculation if you purchased the fund after February 1, 2018 i.e. after Budget 2018. However if your purchase was on or before January 31, 2018 you would be eligible for grandfathering of capital gains till January 31, 2018 for calculation of long term capital gains.

Purchase price is to be considered higher of (a) and (b). (the idea is that only gains made after Jan 31 are taxable)

a) Actual purchase price

b) Closing NAV as on January 31, 2018

Below are different scenarios and how LTCG would be calculated:

Long Term Capital Gains Calculation for Equity Mutual Fund - Scenarios

Long Term Capital Gains Calculation for Equity Mutual Fund – Scenarios

The Short Term Capital Gains are taxed at 15.6% (including cess). 

Download: Tax Planning Guide for FY 2018-19

Non-Equity Mutual Funds (includes Debt, Liquid, International Funds, etc):

Long Term Capital Gains/Losses: If the redemption of mutual fund happens after 3 year of investment [Changed in Budget 2014], the gains or losses are classified as long term capital gains/losses in case of equity mutual fund.

Short Term Capital Gains/Losses: If the redemption of mutual fund happens with-in 3 year of investment, the gains or losses are classified as short term capital gains/losses in case of equity mutual fund.

The tax treatment on both types of capital gains are different.

Long Term Capital Gains are taxed at the rate of 20.8% (including cess) after taking indexation benefit.

The Short Term Capital Gains are added to the total income and taxed at the marginal income tax slabs.

The info-graphic below summarizes the capital gains tax on Mutual Funds:

Capital Gains Tax on Mutual Funds in India for FY 2018-19

Capital Gains Tax on Mutual Funds in India for FY 2018-19

STT on Mutual Funds:

In addition to above there is 0.001% Securities Transaction Tax (STT) (changed from 0.25% from June 2013) is levied on redemption of Equity Mutual Funds irrespective of the holding period

There is no STT for non-Equity mutual Funds

Also Read:  Best Tax Saving Investments u/s 80C

Dividend Distribution Tax on Mutual Funds:

In addition to the above capital gains tax and STT there is Dividend Distribution Tax (DDT) which is paid directly by Mutual Funds. The dividend paid to investor is after the deduction of DDT and so the dividend received is Tax Free in the hands of investors. The rates of DDT are as follows:

Dividend Distribution Tax as payable by Mutual Fund Scheme

Dividend Distribution Tax as payable by Mutual Fund Scheme

Also Read: 3 Reasons Why Growth Option is better than Dividend Option in Equity Mutual Fund?

Wealth Tax on Mutual Funds:

There is no Wealth Tax on Mutual Fund Investments

TDS on Mutual Funds:

There is no TDS (tax Deduction at Source) for Domestic Investors on redeeming any Mutual Fund.
However NRI investors are subjected to TDS as follows:

TDS on Mutual Funds for NRIs

TDS on Mutual Funds for NRIs

We hope the post would have cleared your doubts on various taxes (like Long Term or Short Term Capital Gains Tax, Dividend Distribution Tax, STT) associated with the Equity and Debt Mutual Funds.

6 thoughts on “Tax on Equity and Debt Mutual Funds [for FY 2018-19]

  1. Dhiraj Patel says:

    A mutual fund is a pool of money collected from multiple investors and is managed by a fund manager whose aim is to make gains by investing in securities such as equity and debt. Mutual funds give individual investors access to large, professionally managed portfolios.

  2. K T Jadhao says:

    nice information regarding tax on mutual fund

  3. Kamal Garg says:

    Please envisage a scenario where there is a capital loss – both short term as well as long term.
    What is the treatment of capital loss – how to calculate (whether original acquisition cost or 1st February 2018 price to be taken into account – whichever is higher).
    Please give a detailed post only on capital loss part including how to calculate and how to carry forward loss, if any.

  4. BOBBY GOREJA says:

    vERY INFORMATIVE. Thanks!
    But this is all theory!
    Please write an article on how to fill the SCHEDULE CG of ITR 2, specifically the columns under which to show:
    1. LTCG from Debt MF
    2. STCG from |Equity MF
    3. STCG from debt MF.
    What’s important is how to fill the ITR correctly, such that the capital gains from mf gets reflected correctly.
    A complete guide on how to fill schedule CG correctly, is the need of the hour.
    With live examples.
    Under what columns to drop the figure of capital gains for the LTCG, STCG from both Debt and Equity MF.
    tHANKS !!!!~

    • Thanks for your suggestion, We would cover the same in a different post.

      • BOBBY GOREJA says:

        Thanks for accepting my suggestion.
        Looking forward to such post.
        Plz do use pictures of the columns of Schedule CG while making your post.
        That would be most helpful.

        Eagerly awaiting …..l

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