Contents
Overview
We invest money to earn something. It could be in the form of dividends or interest. And when there is some return in the form of cash, then there is income tax, which in the case of capital gains depends upon the type of investment and the period for which it was invested. This is the way government charged tax on mutual funds.
What are the types of holding period?
There are 2 types of holding period
- Short term holding period
- Long term holding period
Keep reading on Best mutual funds schemes to consider investing in 2019
Long term holding period
In the case of equity funds and balanced funds, the holding period of more than 12 months is called a long term holding period. And in the case of debt funds, investments done for more than 36 months is called a long term holding period. In both of these cases, long term capital gains or LTCG is applied.
Short term holding period
Furthermore, the holding period of fewer than 12 months in the case of equity funds and balanced funds, and investments done in debt funds for less than 36 months is considered short term holding period. In some of the cases, there’s is even shorter holding period. Like in the case of a treasury bill, 91-day bonds.
| Funds | Short-term | Long-term |
|---|---|---|
| Equity MF | Less than 12 months | 12 months or more |
| Balanced MF | Less than 12 months | 12 months or more |
| Debt MF | Less than 36 months | 36 months or more |
Capital gains tax on mutual funds
Capital gain is the difference between what an investor paid for and the value he/she gets when the investment is sold. So, let’s say Mr. X buys an investment worth Rs. 1,00,000 and he sells it for Rs. 1,50,000 after 3 years, so the difference, i.e. Rs. 50,000 is chargeable under tax on mutual funds as Long Term Capital Gain.
| Type of Scheme | Particulars | Short Term Capital Gains Tax | Long Term Capital Gains Tax |
| Equity-oriented schemes | Holding Period | Up to 12 months | More than 12 months |
| Tax Rate | 15% | 10%* | |
| Non-equity oriented schemes | Holding Period | Up to 36 months | More than 36 months |
| Tax Rate | Income Tax Slab Rate of Investor | 20% after indexation |
Tax saving equity funds
When it comes to tax savings, equity mutual funds comes at the top of it. The investments are done in multiple companies in the equity holdings of it. After redemption, tax on mutual funds is exempted up to Rs. 1 lakh of the returns and after this amount, the tax on mutual funds is charged at the rate of 10% without the benefit of indexation. The lock-in period is 3 years i.e. you cannot redeem your amount before 3 years.
Non-tax saving equity funds
Long term capital gains in this scheme are exempted from tax on mutual funds up to Rs. 1,00,000 and 10% is charged over this amount. This taxon mutual funds is charged without indexation.
Tax on mutual funds, in this case, is charged at the rate of 15% if the amount is withdrawn within 12 months.
Debt funds
Any long term capital gain earned on debt funds is charged at the rate of 20% after indexation. Indexation is a process where inflation is taken into account. After this, the purchase price of the investment is reduced, reducing the capital gains and ultimately decreasing the tax on mutual funds.
Balanced funds
In the case of balanced funds, 65% of the funds are invested in equity and equity-related instruments. Which is why the tax on mutual funds is the same as in the case of non-tax equity saving funds.
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SIPs
In the case of a systematic investment plan, the investment is made regularly according to a specific system. It could be yearly, monthly, fortnightly, weekly or daily.
When it comes to tax on mutual funds, each installment is treated individually and taxed accordingly. Let’s say you invest monthly Rs. 1,000 and redeem the amount after 12 months. In this case, only the first installment will be exempted from tax on mutual funds as it has completed its tenure of 1 year. And the rest of the gains will be taxed under short term capital gains.
Must read on Tax benefits on investing in mutual funds
Securities transaction tax
When the sale of equity funds or balanced funds is made, then 0.001% is levied by the company itself in the form of STT (Securities transaction tax). Debt funds are exempted from this taxon mutual funds.
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Do go through:
Best ELSS Funds to Invest in 2019
Understanding Balanced Mutual Funds: Benefits, Taxes & Comparison
