Mutual Funds Taxation 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 tax on mutual funds for FY 2021-22 [AY 2022-23].
For Taxation purpose the Mutual Funds can be divided into Two categories:
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.
There is always a debate on what is the right way to invest in Mutual Funds – SIP or lumpsum? We give you examples and situations on which of the investment method outperforms. Do read SIP Vs. Lumpsum – Which is the Best way to Invest in Mutual Fund?
Additionally Read about common myths about SIP investment in Mutual Funds
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)
Below are different scenarios and how LTCG would be calculated:
The Short Term Capital Gains are taxed at 15.6% (including cess).
As you can see with the above income tax calculation, salary components and salary structure plays a very important role in how much income tax you pay. We have come up with some optimised salary structure using which you pay NO income tax even with CTC of more than Rs 20 Lakhs.
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.
There can be several situations when we look for regular income. This is especially true for people after retirement without any pension. Also there would be new entrepreneurs who need regular income until their start-up stabilises. We tell you 13 investments which can generate regular income for you along with their pros and cons.
The info-graphic below summarizes the capital gains tax on Mutual Funds:
Budget 2020 has made dividend income taxable as income from other sources and is taxable at the applicable income tax slab. Also Mutual funds have to deduct 10% TDS (tax deduction at source) if the dividend paid is more than Rs 5,000.
Eligible person can submit Form 15G/H to the concerned mutual fund to prevent TDS.
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
The Dividend Distribution Tax (DDT) has been abolished in Budget 2020 and is effective from April 1, 2020.
Do you know how much tax you need to pay for the year? Have you taken benefit of all tax saving rules and investments? Should you use the “NEW” tax regime or continue with the old one? In case you have all these questions just Download the Free Excel Income Tax Calculator for FY 2021-22 (AY 2022-23) and get your answers.
There is no Wealth Tax on Mutual Fund Investments
There is no TDS (tax Deduction at Source) for Domestic Investors on redeeming any Mutual Fund. However there is TDS of 10% for dividend payment.
However NRI investors are subjected to TDS as follows:
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.
Budget 2020 introduced tax on dividends of mutual funds. Now dividend income is taxed at your income tax marginal rates.
You should follow following steps to calculate tax on mutual funds:
1. Classify the fund in – equity or non-equity funds.
2. Check Investment Duration to check if the gains are short term or long term capital gains
3. Long Term capital gains are taxed as follows:
i> Equity Fund – 10.4%
ii> Non Equity Fund – 20.8%
3. Short Term capital gains are taxed as follows:
i> Equity Fund – 15.6%
ii> Non Equity Fund – as per income tax slab
The good thing about mutual funds is – its taxed only after you withdraw it (unlike Fixed deposits). So all tax calculation explained in above section comes in effect only after you withdraw mutual fund investment.
Tax on Mutual Fund depends on type of mutual fund and duration of investment. Its as follows:
Long Term capital gains are taxed as follows:
i> Equity Fund (invested for more than a year) – 10.4%
ii> Non Equity Fund (invested for more than 3 years) – 20.8%
Short Term capital gains are taxed as follows:
i> Equity Fund (invested for less than a year) – 15.6%
ii> Non Equity Fund (invested for less than 3 years) – as per income tax slab
There is no TDS on Mutual Fund redemption. Hence you have to calculate the tax yourself and pay it as advance tax.
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Good explanation. Never thought mutual fund is so beneficial for us.
I have started investing in mutual funds through Kotak Securities website.
My mother is Pensioner and used to file ITR-1 for income tax processing. In 2015 she had invested Rs. 25000 in a equity mutual fund and redeemed it last year (October 2019) with capital gain of Rs. 1514. My question is, how should she show this Long term Capital gain (of Rs. 1514) in ITR-1? Should it be under "Other income" head or under "Exempt Income"? OR Does she need to file ITR-2 for this partly amount altogether? Note that her Net Taxable income (after exemptions) is less than 2.2 Lakhs, but needs to file return to get refund back for TDS deducted on a term deposit).
For equity mutual fund purchased after 31 Jan 2018 and sold an year after the purchase, ITR 2 Schedule 112A column 10 can not be filled. If we fill it can give wrong result in some cases. But the software insists on entering numeric value in Column 10 to Validate. What can be done?
Please show calculations for NRI's also. In above article for resident Indians for short term capital gain on equity oriented Mutual funds is not fully correct. If taxable income is less than exempt income than short term capital gain is to be included in the income and only after the free limit is exhausted then only he is required to pay tax at 15 %. Please clarify.
Also this facility is not available for NRIs for short term inclusion in taxable income free limit for equity oriented mutual funds while for debt funds NRIs can also claim this free taxable income limit. Please confirm on this.
There are currently 16 different categories of debt funds available. The regulator has segregated the schemes based on the modified duration of the underlying portfolio, while certain categories like Credit Risk Funds and Corporate Bond Funds are defined as per the credit quality of the underlying portfolio. Mutual fund are expected to generate the best risk-reward based on the scheme’s investment mandate and in ultimate good faith of the investor.
Nice post sir...plz also guide how to calculate return/profit on mutual fund.Casr and etc if possible with examples. As we founf 1 yr return @7% and after 5 yr @24% in paytm money...Thank u for reading.
sure will try
Nice article
Dear Amit, you are doing an absolutely fantastic job. Apnaplan.com is greatly useful even for chartered accountants! I have a couple of requests. 1) If you can add a Search box on the top of the website, it will be very useful. 2) I did not find anything on Section 89 [1]. Recently, all CG employees got some arrears on account of 7th CPC and they will be greatly benefited if you can please explain how to spread the arrears over the past years and save some decent amount in tax.
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.
nice information regarding tax on mutual fund