Taxability of Mutual Fund: Is your mutual fund taxable or exempt?

Taxation

Investment is a good habit to make our future more independent. Keeping some part of our money to get more money in the future is called investment. In today’s economy, there are various investment options available to us like:-

  1. Saving bank account
  2. Fixed Deposit in Bank
  3. Recurring Deposit in bank
  4. Fixed Deposit of Corporate
  5. Government Securities
  6. Bonds 
  7. Debentures
  8. Money market instruments like T-bill, Commercial paper, Certificate of deposit, etc.
  9. Equity shares
  10. Mutual Fund (maybe equity fund, debt fund, overnight fund, liquid fund or balanced fund, etc.)
  11. Gold
  12. Real Estate
  13. VPF, PPF, or SSY, or other social security investment schemes. etc.

Each of the above investment options has its own risk & reward. Each option has some benefits and some drawbacks. Hence we need to analyze properly before taking any investment decision. Each of the above options has its own taxability. 

Profits from Mutual Fund

In today’s time, Mutual Fund is a very attractive option of investment and people are getting attracted toward it. The taxability of mutual funds is very important to understand before investing in any mutual fund.  We can earn two types of gains, from the mutual fund:-

  1. Capital Gain (sell value above buy value of units of mutual fund).
  2. Periodic return (dividend or interest received periodically)

Types of capital Gain from Mutual Fund

Capital gain earned from the mutual fund can be of two types:-

Short term capital gain:-  
  • If the holding period of an equity-oriented mutual fund is less than 12 months then the gain released from this transaction is known as short-term capital gain.
  • Further, if the holding period of debt oriental mutual fund is less than 36 months then the gain released from this transaction is known as short-term capital gain.
Long term capital gain:-  
  • If the holding period of an equity-oriented mutual fund is greater than or equal to 12 months then the gain released from this transaction is known as long-term capital gain.
  • Further, if the holding period of debt oriental mutual fund is greater than or equal to 36 months then the gain released from this transaction is known as long-term capital gain.
Equity Oriented Mutual Fund:-

For the purpose of income tax, if the equity exposure of a mutual fund is 65% or more then it is called Equity oriented mutual fund. Hence to become an equity-oriented mutual fund, a minimum 65% of the investible fund should be invested in equity shares of domestic companies. If this condition does not meet then the fund shall be treated as a debt-oriented fund. 

Taxability of Mutual Fund

Taxability of various gains of various types of a mutual fund is given in the table below:-

Types of Mutual FundTypes of Benefits from fundTaxability
Equity Oriented Mutual Fund (Including Tax saver fund)(fund having minimum 65% equity exposure)Short Term capital gain (period<12 months)Taxable @ 15%
Long Term capital gain (period>= 12months)Exempt upto Rs 1 Lakh and if gain is above Rs. 1 Lakh then taxable @ 10% (applied only on gain above 1 lakh)
Dividendw.e.f 1st April 2020, taxable as per slab rate. Before 1-4-2020, dividend was exempt in hand of shareholder as company was liable to pay DDT.
Debt Oriented Mutual Fund (including overnight fund, liquid fund, money market fund etc.)Short Term capital gain (period < 36months)Taxable as per slab rate.
Long Term capital gain (period<= 36months)20% After Indexation
DividendTaxable as per slab rate under the head other income.

SIP (Systematic investment Plan)

SIP is a way of investing a small amount in mutual funds periodically like weekly, monthly, quarterly, bi-annually, or annually at the ease of the investor. The taxation of mutual funds is calculated treating each transaction of SIP separately for calculation of holding period. Tax rates are the same as explained in the above table irrespective of the fact that investment was done through SIP mode or lump sum.

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