Mutual Funds have seen a surge in investments over the last few years. In fact, ever since the Narendra Modi government came to power, we have seen an unprecedented surge in investments that are pouring into the mutual fund sector.
Let us understand how mutual funds are taxed.
For the purpose of taxation, you have to divide mutual funds into:
a) Equity schemes
Investors in equities and equity mutual fund schemes have been a privileged lot. Equity and equity schemes, both offer the same tax benefits. So, if you have bought an equity mutual scheme and sold it at a profit after holding onto it for more than 1 year, there would be no tax liability. Check daily mutual funds gainers
However, if you sell them before 1 year, there would be a tax liability of 15 per cent. In short, less than 1 year of holdings in an equity mutual fund scheme, would attract a short term capital gains tax of 15 per cent.
Apart from this it must also be remembered that there would be an exit load that would be applicable.
2) Debt mutual fund schemes
Debt mutual fund schemes do not get the same tax benefits as equity mutual fund schemes. In fact, for debt mutual fund schemes, they qualify for long term capital gains, only if the investment is held for more than 3 years.
If they are sold beyond three years, than 20 per cent tax would be applicable with indexation. This would make it very difficult to say what the exact tax liability on debt mutual funds would be, given that it has to take into account indexation.
If debt mutual fund schemes are sold before a period of 1 year, than they would be taxed according to the investors tax liability.
So, it depends whether you are in the 10 per cent, 20 per cent or 30 per cent tax liability.
It must be remembered that equity mutual funds are a better proposition, when it comes to tax liability, on account of the shorter holding period.
However, it does not mean that you have to place money in equity mutual fund schemes. You have to discern and make your own choice, depending on your age, risk appetite etc.