10 Points You Should Read About Income Tax Rules on Mutual Fund Gains

It is projected that people are investing nearly Rs. 5,000 crore every month through SIPs.

In July, the asset under management of Indian mutual fund industry touched all time high of Rs.20 lakh crore. This is due to the strong inflows into both equity segments and debt. Retailers are investing record amount into mutual funds through SIPs. It is projected that investors are putting in an estimated figure of Rs.5000 crores every month through SIPs. Systematic Investment Plan or SIP is an investment plan offered by mutual funds, wherein one could invest a set amount in a mutual fund scheme at pre-defined intervals.

Below points will help you understand how much income tax you have to pay on gains from mutual fund:

1) For tax purposes, a mutual fund scheme that invests 65 per cent or more of its portfolio in equities or equity-related instruments, is considered equity funds.

2) Apart from equity diversified funds, arbitrage funds are also considered equity funds. Arbitrage funds invest in equity and derivatives such as futures and options while equity income funds invest in a mix of equity, equity derivatives and debt. If a balanced fund invests minimum 65 per cent in equities, it is considered an equity fund for tax purpose.

3) Profit held for more than a period of 12 months, from equity mutual fund units whether SIP or lumpsum is considered as a long term capital gain. As per the policy, there is no tax is applicable on the long-term capital gains from equity funds.

4) For the duration less than 12 months, tax on short-term capital gains is applicable at 15% on the gains from equity funds.

5) Many investors opt for dividend option while investing in equity mutual funds. Dividend income from equity mutual funds is tax-free, irrespective of when you receive it.

6) Investments in debt funds are considered long term only if they are held for more than three years.

7) Currently, the long-term capital gain on debt funds is taxed at the rate of 20 per cent. However, investors get the benefit of indexation on their original debt fund investment. This indicates that the adjustment of original investment is done in accordance for the price if inflation and taxes. Since the original cost of investment goes up after factoring in inflation, long term capital gains tax comes to negligible levels.

8) But before three years if the debt mutual fund investments are redeemed or sold, whatever short-term gains you have are taxed as per your tax slabs.

9) Income from debt funds also come in the form of dividends. Any dividend declared by a debt mutual fund is exempt from tax in the hands of investors.

10) However, mutual fund houses pay dividend distribution tax @ rate of 28.84 per cent (including surcharge and cess) before handing out the dividends to investors.