What are the Tax Implications of Mutual Funds?

➔ Capital gains:

The difference between the purchase and sale prices are known as capital gains and are liable to tax

➔ Dividend income :

The portion of the accumulated profits distributed by the mutual fund houses is known as a dividend and is subject to certain taxes

How do investors earn profits in mutual funds?

Investors can earn income in two ways from their mutual fund investments. First, capital gains are realized from the appreciation of the prices of the units. Secondly, mutual fund houses may distribute surplus cash in the form of dividends paid to the unit holders.

Mutual Fund Taxation

➔ Debt Funds

Irrespective of the holding period, capital gains earned on investments in debt mutual funds are taxed as per the slab rates of the investors.

➔ Conservative Hybrid Funds

Between 75% and 90% of the fund corpus is invested in debt instruments. The capital gains earned on such funds are taxed as per the slab rate of the investors.

➔ Balanced Hybrid Funds

The fund corpus is almost equally invested in equity and debt instruments. Short-term capital gains where the holding period is less than three years are taxed as per the investors' slab rates. Long-term capital gains earned when the holding period exceeds three years are taxed at 20% without indexation benefits.

➔ Aggressive Hybrid Funds

A majority of the fund corpus is invested in equity and equity-related instruments. Short-term gains where the holding period is less than 12 months are taxed at 15% whereas long-term gains are taxable at 10% without indexation benefits.

Tax Implications for SIP investments

Systematic Investment Plans (SIPs) allow investors to invest a specific amount at regular intervals. Based on the prevailing Net Asset Value (NAV), the investors receive proportionate units in the mutual fund scheme.

The redemptions on these units are processed on as FIFO (first0in, first-out) basis. For example, if an investor invests in an equity fund SIP for one year. At the end of the year, the capital gains on the first instalment are long-term (since the holding period is 12 months) and taxed at 10% (if the gains are below INR 1 lakh). The capital gains on other instalments are short-term and liable to 15% tax along with the applicable cess and surcharge.

Mutual fund returns are impacted by tax implications. Investors must understand these before making an investment decision. To maximize returns and ensure mutual fund investments are tax-efficient, connect with our SRH experts today.