Understanding Mutual Fund Taxation

Investors disregard tax implications when making financial decisions. An investor gets satisfied with an 8% to 9% interest rate from a fixed deposit plan. The effective post-tax return for an investor in the highest tax bracket is 5.6% to 6.3% if the interest income is taxable. 

Taxation for Different Mutual Funds

Different mutual funds in India give separate returns, and the taxes on the returns differ. Here is different mutual funds taxation: 

1. Equity-based Mutual Funds 

Up to Rs 1 lakh in long-term capital gains (LTCG) is exempt from taxation in equity-based plans. But, a 10% capital gains tax applies to earnings over Rs 1 lakh. Payments from equities mutual funds held for less than 12 months are subject to a flat tax rate of 15%. 

2. Debt-based mutual funds 

Debt mutual funds will be subject to taxation based on the applicable slab rates. The previously available long-term capital gains (LTCG) tax benefits and indexation benefits on debt mutual funds will no longer be applicable. 3. Tax-Saving Equity Funds 

You can enjoy tax deferral and capital appreciation when investing in an Equity Linked Savings Scheme(ELSS.) Section 80C of the Income Tax Act of 1961 recognises it as a valuable tax planning tool. 

4. Hybrid or Balanced Funds 

The taxation of balanced funds is the same as that of mutual funds that invest in stocks. This is because the balance funds are hybrid equity funds that put at least 65% of their assets into stocks. The fund's aim will determine the appropriate allocation %. 

Long-term capital gains up to Rs 1 lakh for the balanced mutual fund are exempt from taxation. Over Rs. 1 lakh, extra profits are taxed at 10%. For balanced funds, the short-term capital gains tax rate is 15%. 

5. SIPs 

A systematic investment plan (SIP) can begin with an equity, debt, or balanced fund. The amount of tax due on SIP gains varies with the type of mutual fund and the time the investment is held. Each SIP is considered a new investment and is taxed.

Conclusion

Investing over the long term is still the best way to reduce your tax liability while increasing your net worth. When investing over a long time, most equity-based funds offer tax-free gains of up to Rs 1 lakh.  

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.