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Mutual Funds and their Taxation

25
Feb

A) Types of Mutual Funds
Broadly, Mutual Funds are categorized into types of Funds:

  • Equity Mutual Funds
  • Debt Mutual Funds

B) Types of taxation on MF:

  • Tax on Income/ dividend distribution by a scheme
  • Tax on Capital Gain/ Loss from the redemption of MF units.

Before we discuss on the taxes on MF, let us first understand the meaning of Equity Fund or a Debt Fund.

Equity Mutual Fund: In such Funds, more than 65% of the investment corpus of a fund is invested by way of equity shares in Indian companies. So, sometimes, even a Balanced Fund (which comprises of both Equity + Debt) is categorized in this category.

Debt Mutual Fund: All the other Funds that do not fit in the category of Equity Mutual Funds will fall under this category. This even includes Fund of Funds (i.e. Mutual Funds that invest in other Funds) and International Funds (i.e. Mutual Funds that have more than 35% of investment in foreign equities)

Capital Gain Tax on Equity Mutual Funds

a) Long Term Capital Gain: If MF is held for more than 1year, it is categorized as Long term Capital Asset. In this case, at the time of redemption, the entire value appreciation is Tax Free as per section 10(38) of Income Tax Act.

b) Short Term Capital Gain: If on the other side MF is sold within one year, it will be categorized as Short Term Capital Gain, and the appreciated amount will be taxed @15% as per section 111A of Income Tax Act.

c) In case of NRIs holding MF, LTCG is tax free and on STCG TDS shall be deducted @ 15% by the MF Company before redemption.

d) In case the unit holder receive any dividend income from Equity MF, the dividend income is completely tax free both in the hands of person receiving the dividend and the person paying the dividend.

Capital Gain Tax on Debt Mutual Funds

a) Long Term Capital Gain: If MF is held for more than 3 years, it is categorized as Long term Capital Asset in case of Debt Fund. In this case, at the time of redemption the Long Term Gain will be taxed @ 20% (plus 3% cess) after claiming the indexation benefit or 10% (plus 3% cess) without indexation.

b) Short Term Capital Gain: If on the other side MF is sold within 3 year of acquisition, it will be categorized as Short Term Capital Gain, and the capital gain amount will be included in investor total income and shall be charged at the rate according to the tax slab.

c) For NRIs, the STCG will be taxed @30% (plus 3% cess) and LTCG will be charged @20% (plus 3% cess). However, in both the cases, TDS shall be deducted by the MF Company before sell/redemption of MF units.

d) In case the unit holder receive any dividend income from Equity MF, the dividend income is completely tax free in the hands of person receiving the dividend but the person paying the dividend has to pay dividend distribution tax before giving the dividend.