The main goal of mutual fund investment is to create wealth. Mutual funds are cost-effective financial products that help accomplish this purpose by increasing their value over time. Gains from mutual funds, like all other assets, are taxable. The amount of tax you pay on your mutual fund investments is highly dependent on factors such as the type of funds you invest in, the length of your investment, and your income tax bracket. Mutual fund investors usually benefit from their investments through capital appreciation and dividends. In the case of equity funds, the fund house announces dividends when the fund earns money. In the case of mutual funds, a different tax rate is applied to different fund types. This tax rate is determined by the mutual fund's type and holding period. The holding time of a mutual fund scheme refers to how long an investor keeps their money in it.
Tax on Equity Funds
Depending on whether the gain on sale is classified as short term or long term capital gains, equity mutual funds are subject to capital gains tax. Both resident and non-resident Indians pay the same capital gains tax rates.
Short-term capital gains (STCG) on the redemption of equity fund units are taxed at a rate of 15%. Long-term capital gains (LTCG) on equities funds up to Rs 1 lakh are tax-free. However, LTCG on stock fund redemptions above Rs 1 lakh is taxed at a rate of 10%, with no indexation benefit.
If the cumulative capital gain in a financial year exceeds INR 1 lakh, an LTCG tax of 10% is imposed on equities funds. When making financial plans, keep in mind that your gains are tax-free up to INR 1 lakh.
Tax on Debt Funds
When you sell a debt fund within three years, you generate short-term capital gains. These gains are added to your total income and taxed according to your tax bracket. When you redeem your debt fund assets after three years, you will realize long-term capital gains. After indexation, these profits are taxed at a rate of 20%.
In the case of non-equity funds (debt funds), long-term is defined as a holding period of three years or longer, and a 20% LTCG tax is imposed on such assets with indexation, which means the purchase price is adjusted upwards for inflation when computing capital gains. Profits from investments held for less than three years are subject to the STCG tax, which is the highest income tax bracket for individuals.
Tax on Hybrid or Balanced Funds
Hybrid or Balanced Funds
If a hybrid fund's equity exposure exceeds 65 percent, the fund is taxed as an equity fund. If not, the provisions for debt fund taxation apply. As a result, you must be aware of the equity exposure before investing in a hybrid fund in order to properly manage your taxes.
How to Save Taxes With Mutual Funds?
The only mutual fund scheme that qualifies for a tax deduction of Rs. 1.5 lakh per year under Section 80C of the Income Tax Act is the Equity-Linked Savings Scheme (ELSS). An ELSS has a 3-year lock-in period, which means that an investment made in it cannot be withdrawn before that time. By investing in an equity-linked savings scheme (ELSS), the top tax-saving investment under Section 80C, you can save up to Rs 46,800 each year in taxes. The majority of ELSS mutual funds' assets are allocated to equities and equity-linked securities.
How Mutual Fund Dividend is Taxed?
When it comes to dividends received from equities mutual funds, investors have no tax burden. Dividends, on the other hand, reach investors after a deduction of 11.648 percent Dividend Distribution Tax (DDT) (including surcharge and cess), lowering the overall in-hand return.
Debt mutual fund distributions are tax-free in the hands of the investor, but dividend disbursements are subject to a 29.12 percent dividend distribution tax (including cessation and surcharge). This effectively lowers the in-hand returns of investors.
At the time of unit redemption, a Securities Transaction Tax (STT) of 0.001 percent is imposed on equity-oriented mutual funds. STT is taken from mutual fund returns, so an investor does not have to pay it separately.
Why do investors have to pay fees to fund houses?
Mutual funds, as previously stated, are managed by experts known as fund managers. Managing large investments on a daily basis necessitates extensive industry knowledge, topic understanding, and a great deal of passion. As a result, the AMC charges the investors a well-deserved fee, which is approved by the Securities and Exchange Board of India (SEBI).
The total expense ratio (TER) is the cost imposed by a mutual fund scheme to manage an investor's investments on their behalf. Management fees, administrative expenditures, and distribution fees are the key components of the expense ratio, which is charged annually.
Tax on Systematic Investment Plan (SIP) Investment
Unlike lump sum investments, which are made all at once, SIP instalments are made over a period of time. While we may consider a one-year SIP to be a single investment. Each payment is treated as a new investment for tax purposes. As a result, each instalment's holding period is determined.
Since they are classified as equity funds for tax reasons because their equity component exceeds 65 percent, the tax treatment stated for equity funds will also apply to balanced funds and arbitrage funds. In the case of debt funds, however, the SIP will continue to use the FIFO mechanism when selling SIP units. The main distinction is that holdings of less than three years are considered short term capital gains and are taxed at your highest rate. Any holding period of more than three years will be considered as long-term capital gains, which will be taxed at a lower rate of 10%. (or 20 percent with indexation benefits).