Capital gains based on holding period

While capital gains are any profits made from selling assets, the holding period of the mutual funds will either make it a short-term gain or long-term gain for income tax implications.

The period that classifies a mutual fund investment gain as long term or short term is currently as follows:

Balanced funds are those hybrid mutual funds that have at least 65 percent investment in equities. Their treatment will therefore be same as any non-tax saving equity fund.

Taxation on capital gains

It is important to note that LTCGs from investments in equity mutual funds before 31 January 2018 will be grandfathered. Only LTCGs made from mutual funds after it will be tax-free to the extent of Rs 1 lakh.

Additionally, Indexation is a method used to factor in the rising inflation from the time the fund was bought till the time it gets sold. In this way, the purchase price in inflated to bring down the quantum of capital gains from the sale of the debt fund in case of taxation. This benefit is not enjoyed by investments in equity or balanced funds.

For taxation on STCG from debt mutual funds, the gains are added to your income and you will be taxed according to your tax slab.

Dividends

Dividends are a share of the profits that investors receive. These gains are tax-free in the hands of investors of both equity fund and debtors if they opt for the dividend option but you should note the implication of dividend distribution tax (DDT) on the types of mutual funds.

DDT is levied on the companies issuing the dividend and the extent of it will decide the amount that will be received by the investor in-hand.

• Equity fund: 11.48 percent including surcharge and cess (proposed in 2018 budget)
• Debt fund or non-equity fund: 29.12 percent including surcharge and cess

SIP

Systematic investment plans (SIP) allow investors to park a fixed amount towards mutual funds periodically. It can be monthly, fortnightly, quarterly or annually.

For tax purposes, these periodically inputs are treated as fresh investments and each is taxed separately.

This means that if you have completed a year of monthly investments towards a SIP, and decide to sell it, only the first installment will be treated as LTCG and you will be charged an STCG tax on the rest of your monthly deposits.

STT

A Securities Transaction Tax (STT) of 0.001 percent is imposed by the fund company when you sell your mutual funds units. These are deducted at source and imposed only on equity funds (and balanced funds) but not on debt funds.