Mutual funds are perceived as one of the best investment options to achieve one’s financial goals. Whether you want to cater to your long-term financial goals, or a short-term goal; whether you wish to create wealth or preserve wealth – whatever may be your underlying financial objective, there are different types of mutual funds that can help to achieve your financial goal. What’s more, you can also invest in tax-saving mutual funds to enjoy tax-efficient returns. However, if you invest in mutual funds, it is important to not ignore tax implications on your investments. This article aims to act as a mutual fund investment guide on tax withdrawal on your mutual fund investments.
Mutual funds are classified into three broad categories. These are:
1. Debt mutual funds
2. Equity mutual funds
3. Hybrid mutual funds or balanced funds
Mutual funds are taxed according to the holding period or the investment duration of their fund. There are two types of holding period – long-term holding period and short-term holding period. Different types of mutual funds have different measures for what constitutes a short-term holding period and long-term holding period. Let’s understand these measures:
Short-term holding period – Equity funds held for a period of less than 12 months are termed as short-term investments. On the other hand, for debt funds to short-term investments, the holding period must be less than three years.
Long-term holding period – Equity funds held for a period of more than or equal to 12 months are considered as long-term investments. Contrary to that, debt funds are considered as long-term investments if the holding period is equal to three years or more.
Taxation on mutual funds
When the sale price of the mutual funds is greater than buying price, an investor earns profit on their mutual fund investments. This profit is termed as capital gains. Depending on the holding period of an investment, capital gains are further divided into long-term capital gains (LTCG) and short-term capital gains (STCG). The tax implications of mutual fund investments are dependent on these capital gains.
Equity funds – LTCG on equity funds are taxed at 10% per annum without the benefit of indexation. LTCG on equity funds of up to Rs 1 lac per annum are exempt from any tax. STCG on debt funds are charged at 15% per annum.
Debt funds – LTCG on debt funds are charged at 20% p.a. with the additional benefit of indexation. STCG, on the other hand, are taxed basis the income tax slab of the investor.
Hybrid funds – Hybrid or balanced funds with more than 65% of their assets allocated to equity and equity-related securities are taxed like equity mutual funds. Similarly, hybrid funds with more than 65% of their assets allotted to debt funds are taxed like debt mutual funds.
Securities transaction tax (STT)
Equity and equity-related securities are also levied with a securities transaction tax at 0.001 % during redemption of equity funds. Note that, investors receive their funds after STT deduction, so it need not be paid separately.
Funny. Please clarify which one is correct:–
7 + 3 = 10
3 + 7 = 10
In this the author says above 65% if invested in debt funds it is treated as debt fund. But DSP says that if less than 65%are invested in equity funds then it is debt fund. Which is correct. Please clarify