A mutual fund distributes the returns to the investors in the form of periodic dividends and appreciation in the value of the units. The tax liability will depend upon the type of mutual fund scheme, the type of investor and the period of holding.
1. If a mutual fund scheme invests more than 65% of its corpus in equities (in domestic companies), it is treated as “Equity oriented scheme” for the purpose of taxation
2. Income can be earned from mutual funds in two forms – dividends and capital gain.
Capital Gains Tax
Dividends from equity mutual funds are tax-free in the hands of investors. But dividends from equity mutual funds are paid after deducting a dividend distribution tax (DDT) of 11.648% (including surcharge and cess), which reduces the in-hand return for investors.
Capital Gains Tax
Dividends from debt mutual funds are tax-free in the hands of the investor but dividend payouts from debt mutual funds are subjected to a dividend distribution tax of 29.12% (including cess and surcharge). This effectively reduces the in-hand return for investors.
These invest in arbitrage opportunities in cash and derivative segments of the equity markets and are treated as equity funds for the purpose of taxation.
For income tax purposes, international funds (which invest in stocks abroad) and fund of funds (a mutual fund scheme that invest in different mutual funds) are considered as debt funds. Tax rules that apply to debt funds are also applied to gains or returns from international funds and fund of funds.
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