While it is prudent to invest through mutual funds, it is also important to understand the tax aspects. There are two types of income that one can receive from a mutual fund investment. First is dividend and second is capital gain/loss at the time of sale. Both have different tax implications. It also depends upon the type of scheme—equity or nonequity— and the duration of holding the investment.

Dividend income

People who have invested in the dividend option receive dividend as an income and it’s tax-free. However, dividend distribution tax (DDT) is applicable and is paid by the fund house at the time of declaration of dividends. For equity funds, the DDT is 10% plus applicable surcharge and cess. For non-equity schemes the applicable tax depends upon the type of tax assessee —individual or HUF @20%.

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Capital gain–Equity funds

Profit made on sale of mutual fund investments is termed capital gain. For equity oriented schemes, if the investment is held for 12 months or less, it is termed as short term capital gain and taxed at 15%. If the investment is held for more than 12 months, it is termed as long term capital gain (LTCG) and taxed at 20%, in case the total LTCG for the year is above Rs 1 lakh.

Capital gain–Non-equity

For non-equity schemes, if the investment is held for 36 months or less, it is termed as short term capital gain and taxed at 20%. If the investment is held for more than 36 months, it is termed as LTCG and taxed at the highest tax slab applicable to the investor.

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Indexation benefit

In case of LTCG for non-equity funds, investors can avail indexation benefit. Indexation refers to recalculating the purchase price, after adjusting for inflation index, as published by the Income Tax authorities. Since the purchase price is adjusted for inflation, the capital gain gets reduced.

Points to note

  • Investments up to Rs 1.5 lakh in notified equity linked savings schemes are eligible for deduction u/s 80C. However, these are subject to a 3-year lock-in.

  • In case of SIP, each instalment of SIP is taken as a separate investment and holding period is reckoned from the date of that investment.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)





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