Mutual funds are a popular investment option in India due to their potential for generating high returns with relatively lower risks. However, investors should be aware of how mutual funds are taxed in India to avoid any unpleasant surprises at tax time.
In India, mutual funds are taxed based on the type of fund, the holding period, and the investor’s tax bracket. Let’s take a closer look at the tax implications of investing in mutual funds in India.
Taxation of Equity Mutual Funds
Equity mutual funds invest at least 65% of their portfolio in equities or equity-related instruments. These funds are classified as equity-oriented funds for taxation purposes. Here are the tax implications of investing in equity mutual funds:
- Short-term capital gains tax (STCG)
- If an investor holds equity mutual funds for less than one year, any gains made on the investment are considered short-term capital gains (STCG) and taxed at a rate of 15% plus a surcharge and cess as applicable.
- Long-term capital gains tax (LTCG)
- If an investor holds equity mutual funds for more than one year, any gains made on the investment are considered long-term capital gains (LTCG).
- From the financial year 2018-19 onwards, long-term capital gains tax on equity mutual funds are taxed at 10% plus a surcharge and cess as applicable, if the gains exceed Rs. 1 lakh in a financial year.
Taxation of Debt Mutual Funds
Debt mutual funds invest primarily in debt and money market instruments such as government securities, corporate bonds, and treasury bills. The following are the tax implications of investing in equity mutual funds:
- Short-term capital gains tax (STCG)
- If an investor holds debt mutual funds for less than three years, any gains made on the investment are considered short-term capital gains (STCG) and taxed as per the investor’s tax bracket.
- Long-term capital gains tax (LTCG)
- If an investor holds debt mutual funds for more than three years, any gains made on the investment are considered long-term capital gains (LTCG) and taxed at a rate of 20% with the indexation benefit.
- Indexation adjusts the purchase price of the investment for inflation during the holding period, thereby reducing the tax liability.
Taxation of Balanced Mutual Funds
Balanced mutual funds invest in a combination of equities and debt instruments. Here are the tax implications of investing in balanced mutual funds:
- Short-term capital gains tax (STCG)
- If an investor holds balanced mutual funds for less than one year, any gains made on the investment are considered short-term capital gains (STCG) and taxed at a rate of 15% plus a surcharge and cess as applicable.
- Long-term capital gains tax (LTCG)
- If an investor holds balanced mutual funds for more than one year, any gains made on the investment are considered long-term capital gains (LTCG).
- From the financial year 2018-19 onwards, long-term capital gains tax on balanced mutual funds is taxed at 10% plus a surcharge and cess as applicable, if the gains exceed Rs. 1 lakh in a financial year.
Conclusion
Investors should always consider the tax implications of investing in mutual funds in India. While equity mutual funds have a lower long-term capital gains tax rate compared to debt mutual funds, investors should consider their investment goals and risk tolerance before making an investment decision.
Additionally, investors should consult a tax advisor to ensure that they are complying with all applicable tax laws and regulations.
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