Mutual Fund Taxation: Mutual funds are a popular investment option to get better returns. Mutual funds are a means where money can be invested to fulfill the short-term, mid-term and long-term objectives. Mutual funds also have a tax-saving scheme ELSS, where they can avail tax exemption under Section 80C of the Income Tax Act on investments up to Rs 1.5 lakh. But if you are a mutual fund investor, then tax rules should also be kept in mind while applying money.
Mutual funds provide benefits in two ways, such as capital gains and dividends. Capital gains are taxed by the investor. At the same time, the tax levied on mutual funds dividend is also called dividend distribution tax (DDT) and it is paid by the fund house. At present, you should understand the whole mathematics of income tax in mutual funds.
Rules for equity and debt funds
Tax liability for equity and debt funds in mutual funds varies. Investing in equity mutual funds for more than 1 year is considered as long term investment. At the same time, it is considered short term investment if it is redeemed before 12 months.
Apart from Equity Oriented Scheme, all other mutual fund schemes like debt, liquid, short term debt, income funds, government securities, fixed maturity plan last for 3 years or 36 months, it is considered as long term investment. At the same time, it is considered a short term investment if redeemed before 36 months.
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How is tax levied on equity funds
In the equity mutual fund scheme, the returns from long term investment attract a long term gain tax of 10 per cent. However, long term gain tax is not levied on returns up to Rs 1 lakh. But if you redeem it before 12 months, then 15% short term capital gains tax is levied.
How tax is levied on debt funds
Returns from long-term investments in debt mutual funds attract 20 per cent tax after indexation. But cashing on short-term investment attracts short-term capital gains tax, which is based on the tax slab of the investor.
Important things for investing in mutual funds
Scheme selection is not a one-time process. Rather, you should evaluate the scheme every year. You can get rid of underperformers schemes by assessing mutual fund portfolios.
The assessment helps the investors to know whether their investment is on track to give good returns in the long term. With this, where there are low returns, you can move towards a scheme that gives better returns.
Sometimes good returns are available at a huge cost. Because the risk of a scheme can be very high. Therefore, assess the risk-return features of a scheme.