Mutual Fund Taxation: When it comes to investing, mutual funds emerge as a better option. The biggest reason for this is that it not only helps in meeting financial goals but also proves to be tax-efficient instruments. Fixed deposits are also the preferred option of most people for investment, but its biggest disadvantage is that if you fall in the tax bracket with the highest rates, then when the interest earned on FD is added to your income, then it is at the highest rate. Tax has to be paid. In this case, investing in mutual funds is preferable and the returns on it are taxed differently, instead of adding them to taxable income and calculating tax slab-wise. Apart from these, the Finance Ministry also levies a Securities Transaction Tax (STT) of 0.001 per cent on the purchase and sale of an equity or hybrid equity-oriented fund. No STT is levied on the purchase and sale of units of the debt fund.
Do tax calculation before investing in SIP, it will be a big help in maximizing returns
There are two types of returns on investment in mutual funds
There are two types of returns on investment in mutual funds – dividends and capital gains. When the company has surplus cash left, it is given as dividend in proportion to the investment of the investors. To calculate the tax on it, it is added to the taxable income and the tax is calculated according to the slab. At present, dividend up to Rs 10 lakh in a financial year is tax-free. On the other hand, capital gain is the profit made on withdrawal of investment in mutual fund and tax on it depends on whether the capital is invested in equity, debt or hybrid fund and for how long it has remained invested.
This is how tax liability on capital gains is made
- Tax Liability on Capital Gains of Equity Funds: If the holding period of equity funds is less than 12 months, then the profit earned on it will be short term capital gains and will be taxed at a flat 15% rate. Apart from this, cess and surcharge are also levied on it. Holding for more than 12 months will attract long term capital gains and gains up to Rs 1 lakh are tax-free. Long term capital gains above Rs 1 lakh are taxable at the rate of 10 per cent and also do not get indexation benefit. Apart from this, cess and surcharge are also levied on it.
- Tax Liability on Capital Gains of Debt Funds: Mutual funds which have more than 65 per cent debt instruments in their portfolio come under debt funds. If this fund is redeemed before three years, it attracts short-term capital gains and is added to the taxable income and becomes taxable as per the slab rate. If the units of the debt fund are sold after three years, the profit is long term capital gain and is liable to tax at the rate of 20 per cent after indexation. Apart from this, cess and surcharge are also levied on it.
- Capital Gains on Hybrid Funds: Tax calculations will be done according to the category to which the mutual fund has more than 65 per cent of the instruments in the portfolio. For example, if more than 65 percent of the exposure is to equities, that is, more than 65 percent of the investment is in equities, then tax will be paid on the basis of equity fund.