{"id":4047,"date":"2021-08-20T08:28:45","date_gmt":"2021-08-20T02:58:45","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=4047"},"modified":"2022-05-24T15:03:52","modified_gmt":"2022-05-24T09:33:52","slug":"mutual-fund-taxation","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/mutual-fund-taxation\/","title":{"rendered":"Mutual Fund Taxation: How Different Mutual Funds Are Taxed and Other Benefits"},"content":{"rendered":"\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/\">Mutual funds<\/a> are often promoted as a good way to build wealth over time. However, the gains made when mutual fund units are redeemed attract taxes. One must understand the tax implications on their mutual fund investments to be able to evaluate the actual returns one makes through investing in <a href=\"https:\/\/blog.tickertape.in\/types-of-mutual-funds-a-quick-overview\/?utm_source=blog&amp;utm_medium=article\" rel=\"nofollow noopener\" target=\"_blank\">mutual funds<\/a>. In this article, let\u2019s understand tax on mutual funds.&nbsp;<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-fund-taxation\/#How-do-mutual-funds-reward-us\" title=\"How do mutual funds reward us?\">How do mutual funds reward us?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-fund-taxation\/#Tax-implications-on-dividends-from-mutual-funds\" title=\"Tax implications on dividends from mutual funds&nbsp;\">Tax implications on dividends from mutual funds&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-fund-taxation\/#Tax-implications-on-capital-gains-from-mutual-funds\" title=\"Tax implications on capital gains from mutual funds\">Tax implications on capital gains from mutual funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-fund-taxation\/#Taxes-on-capital-gains-from-equity-oriented-funds\" title=\"Taxes on capital gains from equity-oriented funds\">Taxes on capital gains from equity-oriented funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-fund-taxation\/#Taxes-on-Debt-funds\" title=\"Taxes on Debt funds&nbsp;\">Taxes on Debt funds&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-fund-taxation\/#Taxes-on-hybrid-funds\" title=\"Taxes on hybrid funds\">Taxes on hybrid funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-fund-taxation\/#Taxes-on-equity-linked-saving-schemes-ELSS\" title=\"Taxes on equity linked saving schemes (ELSS)\">Taxes on equity linked saving schemes (ELSS)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-fund-taxation\/#Taxes-on-systematic-investment-plans-SIP\" title=\"Taxes on systematic investment plans (SIP)\">Taxes on systematic investment plans (SIP)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-fund-taxation\/#A-snapshot\" title=\"A snapshot\">A snapshot<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"how\"><span class=\"ez-toc-section\" id=\"How-do-mutual-funds-reward-us\"><\/span><strong>How do mutual funds reward us?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Investors are rewarded in two ways in lieu of their mutual fund investments:<\/p>\n\n\n\n<ul><li><strong>Dividends<\/strong>: Dividends are the share of profits that companies willingly distribute among the <a href=\"https:\/\/www.tickertape.in\/blog\/shareholders\/\">shareholders<\/a> who have invested in the company.&nbsp;<\/li><li><strong>Capital Gains:<\/strong> Capital gains are any profit or earnings made by the investor when they liquidate their mutual fund holdings, and the selling price is higher than what was paid at the time of buying. If the selling price is lower than the buying price, a capital loss arrives, and obviously, losses are not taxed. Instead, losses are eligible for set-off.<\/li><\/ul>\n\n\n\n<p>Coming back to taxation, both <a href=\"https:\/\/www.tickertape.in\/blog\/cash-dividend-vs-stock-dividend\/\">dividend<\/a> income and capital gains arising from mutual funds are subject to taxes.&nbsp;&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"implications\"><span class=\"ez-toc-section\" id=\"Tax-implications-on-dividends-from-mutual-funds\"><\/span><strong>Tax implications on dividends from mutual funds&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Until 31 Mar 2020, the dividend income was tax-exempt in the receiver&#8217;s hands; the companies paying out dividends were supposed to pay a Dividend Distribution Tax.<\/p>\n\n\n\n<p>However, the Finance Act 2020 brought about many changes in the process of taxation on dividends. With effect from 1 Apr 2020, dividends received from mutual funds are subject to Tax Deduction at Source (<a href=\"https:\/\/www.tickertape.in\/blog\/what-is-tds-and-how-to-file-it\/\">TDS<\/a>) @ 10% if the dividend income from a mutual fund is more than Rs 5,000. However, as a COVID-19 relief measure, the government reduced the TDS rate to 7.5% for distribution from 14 May 2020 until 31 Mar 2021.<\/p>\n\n\n\n<p>The dividend earned is also subject to taxation according to the tax slab of the assessee, i.e., the dividend earned through mutual funds is added to the taxable income, and tax is calculated according to the tax slab the investor belongs to.&nbsp;<\/p>\n\n\n<span class='bctt-click-to-tweet'><span class='bctt-ctt-text'><a href=\"https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fwww.tickertape.in%2Fblog%2Fmutual-fund-taxation%2F&#038;text=From%201%20Apr%202020%2C%20dividends%20received%20from%20mutual%20funds%20are%20subject%20to%20TDS%20%40%2010%25%20if%20the%20dividend%20is%20more%20than%20Rs%205%2C000.%20However%2C%20as%20a%20Covid-19%20relief%20measure%2C%20the%20govt%20reduced%20the%20TDS%20rate%20to%207.5%25%20for%20distribution%20from%2014%20May%202020%20until%E2%80%A6&#038;via=TickertapeIN&#038;related=TickertapeIN\" target=\"_blank\" rel=\"noopener noreferrer\">From 1 Apr 2020, dividends received from mutual funds are subject to TDS @ 10% if the dividend is more than Rs 5,000. However, as a Covid-19 relief measure, the govt reduced the TDS rate to 7.5% for distribution from 14 May 2020 until\u2026 <\/a><\/span><a href=\"https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fwww.tickertape.in%2Fblog%2Fmutual-fund-taxation%2F&#038;text=From%201%20Apr%202020%2C%20dividends%20received%20from%20mutual%20funds%20are%20subject%20to%20TDS%20%40%2010%25%20if%20the%20dividend%20is%20more%20than%20Rs%205%2C000.%20However%2C%20as%20a%20Covid-19%20relief%20measure%2C%20the%20govt%20reduced%20the%20TDS%20rate%20to%207.5%25%20for%20distribution%20from%2014%20May%202020%20until%E2%80%A6&#038;via=TickertapeIN&#038;related=TickertapeIN\" target=\"_blank\" class=\"bctt-ctt-btn\" rel=\"noopener noreferrer\">Click To Tweet<\/a><\/span>\n\n\n<h2 class=\"wp-block-heading\" id=\"tax\"><span class=\"ez-toc-section\" id=\"Tax-implications-on-capital-gains-from-mutual-funds\"><\/span><strong>Tax implications on capital gains from mutual funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Depending upon the holding period of investment, gains from mutual funds are bifurcated into:<\/p>\n\n\n\n<ul><li><a href=\"https:\/\/www.tickertape.in\/blog\/what-is-short-term-capital-gain-on-shares\/?utm_source=blog&amp;utm_medium=article\">Short term capital gains<\/a> (STCG)<\/li><li><a href=\"https:\/\/www.tickertape.in\/blog\/long-term-capital-gain-on-share\/?utm_source=blog&amp;utm_medium=article\">Long term capital gains <\/a>(LTCG)<\/li><\/ul>\n\n\n\n<p>Taxes vary significantly depending upon the type of capital gains &#8211; short term or long term &#8211; and also upon the type of mutual fund &#8211; <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/\">equity<\/a> or debt.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"capital\"><span class=\"ez-toc-section\" id=\"Taxes-on-capital-gains-from-equity-oriented-funds\"><\/span><strong>Taxes on capital gains from equity-oriented funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>An equity-oriented mutual fund has more than 65% of its corpus invested in the equity of domestic companies.&nbsp;<\/p>\n\n\n\n<p>Short-term capital gains arising from equity funds are taxed at a flat 15%. This taxation has nothing to do with the tax bracket of the individual. Remember, short-term capital gains in equity funds arise when investments are liquidated within one year of purchase.<\/p>\n\n\n\n<p>Long-term capital gains in equity funds arise when investments having a holding period of more than 12 mth, are redeemed. Long-term capital gains are taxed at a flat 10%, for gains in excess of Rs 1 lakh. This means, there is no tax should your long-term capital gain from <a href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds-based-on-market-capitalization\/\">equity mutual funds<\/a> be less than Rs 1 lakh in a year. Cess and surcharge are additionally charged.&nbsp;<\/p>\n\n\n\n<p><strong>Example for STCG: <\/strong>Mr A sold his <a href=\"https:\/\/www.tickertape.in\/blog\/6-factors-investing-in-equity-funds\/\">equity fund<\/a> held for 2 yrs and realized a profit of Rs 3 lakh.&nbsp;<\/p>\n\n\n\n<p>His short-term capital gain tax would be 15% of Rs 3 lakh + cess<\/p>\n\n\n\n<p>Tax liability for Mr A =&nbsp; Rs 3,00,000 x 15.6% = Rs 46,800<\/p>\n\n\n\n<p><strong>Example for LTCG:<\/strong> Mr A sold his equity fund held for 2 yrs and realized a profit of Rs 3 lakh.&nbsp;<\/p>\n\n\n\n<p>His long-term capital gains would be applicable on the excess gains over Rs 1 lakh = 2 lakh<\/p>\n\n\n\n<p>The rate applicable would be 10% + cess.&nbsp;<\/p>\n\n\n\n<p>Tax liability for Mr A = Rs 2,00,000 x 10.4%= Rs. 20,800<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"funds\"><span class=\"ez-toc-section\" id=\"Taxes-on-Debt-funds\"><\/span><strong>Taxes on Debt funds&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/what-are-debt-funds\/?utm_source=blog&amp;utm_medium=article\">Debt funds<\/a> are those having their investments parked in several fixed income-generating securities. When <a href=\"https:\/\/www.tickertape.in\/blog\/what-are-debt-funds\/\">debt funds<\/a> with a holding period of 36 mth are realized, the profit so arrived is short-term capital gains. There&#8217;s no separate taxation route for short-term capital gains from debt funds. The gains are added to the individual&#8217;s taxable income and are subject to taxation based on the individual&#8217;s tax slab.<\/p>\n\n\n\n<p>When held for more than 36 mth, long-term capital gains from debt funds attract taxes<strong> <\/strong>at the rate of 20%, but the benefit of indexation is available. Cess and surcharge are charged additionally.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"hybrid\"><span class=\"ez-toc-section\" id=\"Taxes-on-hybrid-funds\"><\/span><strong>Taxes on hybrid funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A <a href=\"https:\/\/www.tickertape.in\/blog\/hybrid-funds\/?utm_source=blog&amp;utm_medium=article\">hybrid fund<\/a> has the properties of both an equity-oriented fund and a debt fund. Capital gains from <a href=\"https:\/\/www.tickertape.in\/blog\/top-hybrid-funds\/\">hybrid funds<\/a> are taxed either like <a href=\"https:\/\/www.tickertape.in\/blog\/difference-between-debt-and-equity\/?utm_source=blog&amp;utm_medium=article\">equity funds<\/a> or debt funds depending on the structure of the hybrid fund. If the equity exposure of the hybrid fund is a minimum of 65%, it is taxed exactly like an equity-oriented fund. Otherwise, it is taxed like a debt fund.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"elss\"><span class=\"ez-toc-section\" id=\"Taxes-on-equity-linked-saving-schemes-ELSS\"><\/span><strong>Taxes on equity linked saving schemes (ELSS)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><a href=\"https:\/\/blog.tickertape.in\/information-on-tax-saving-mutual-funds\/?utm_source=blog&amp;utm_medium=article\" rel=\"nofollow noopener\" target=\"_blank\">ELSS funds<\/a> are known as tax-saving mutual funds. Investments in <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-elss\/\">ELSS funds<\/a> are eligible for deduction up to<strong> <\/strong>Rs. 1,50,000 under Section 80C of the <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-income-tax\/\">Income Tax<\/a>. Investors belonging to the highest tax bracket may be able to save up to Rs 46,350 in taxes (Rs 1.5 lakh x 30.9% tax + cess) by investing in an ELSS fund.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"sip\"><span class=\"ez-toc-section\" id=\"Taxes-on-systematic-investment-plans-SIP\"><\/span><strong>Taxes on systematic investment plans (SIP)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/choose-best-date-for-sip\/?utm_source=blog&amp;utm_medium=article\">SIP<\/a>s give the liberty to <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a> a definite sum of money at regular intervals in a mutual fund scheme. With each instalment, the investor purchases units of the mutual fund. The redemption of <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-sip\/\">SIP<\/a> is on a FIFO basis i.e., first in, first out.&nbsp;<\/p>\n\n\n\n<p>Short-term capital gains from SIPs in equity funds are taxable @ 15% with no threshold limit. In contrast, long-term capital gains from SIPs are exempted from taxes up to Rs 1 lakh, and the excess gains are taxable @ 10% during a financial year.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"snapshot\"><span class=\"ez-toc-section\" id=\"A-snapshot\"><\/span><strong>A snapshot<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Equity-oriented funds<\/strong><\/p>\n\n\n\n<ul><li>Short term capital gain: 15% + 4% cess = 15.6%<\/li><li>Long term capital gain: 10% + 4% cess = 10.4% (if the income exceeds 1,00,000)&nbsp;<\/li><\/ul>\n\n\n\n<p><strong>Debt funds:&nbsp;<\/strong><\/p>\n\n\n\n<ul><li>Short-term capital gain: added to the assessee&#8217;s taxable income.&nbsp;<\/li><li>Long term capital gain: 20% + 4% cess = 20.8%<\/li><\/ul>\n\n\n\n<p><strong>Hybrid equity-oriented funds:<\/strong>&nbsp;<\/p>\n\n\n\n<ul><li>Same as equity-oriented funds<\/li><\/ul>\n\n\n\n<p><strong>Hybrid debt funds:<\/strong>&nbsp;<\/p>\n\n\n\n<ul><li>Same as debt funds.&nbsp;<\/li><\/ul>\n\n\n\n<p>There is no denying that there are significant tax implications on mutual funds, and you are likely to be parted with a portion of your gains on mutual funds. Still, this doesn&#8217;t diminish the viability of mutual funds as an investment avenue with potential for returns over time. Assess the tax implication of the mutual fund on your overall portfolio before investing in mutual funds.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Looking to know how mutual funds are taxed? Click here to read about mutual funds taxation rules, how are mutual funds taxed and important things to know as an investor.<\/p>\n","protected":false},"author":50,"featured_media":3831,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[8,1750],"tags":[444,273,324,441,78,458,552,487],"acf":[],"modified_by":"Aradhana Gotur","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/08\/MF-1-1.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4047"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/50"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=4047"}],"version-history":[{"count":5,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4047\/revisions"}],"predecessor-version":[{"id":8675,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4047\/revisions\/8675"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/3831"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=4047"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=4047"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=4047"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}