How Mutual Funds Returns are Taxed from 2018 in India?

How Mutual Funds Returns are Taxed from 2018 in India-minHow Mutual Funds Returns are Taxed from 2018 in India?


In budget 2018, there is change in long term capital gains tax on equity and equity mutual funds, hence it is important for mutual funds investors to know how mutual fund returns are taxed from 2018 onwards in India. Mutual Funds Taxation guidelines would help you to plan well about your taxes. How mutual fund returns are taxed based on short term capital gains? How mutual funds returns are taxed based on long term capital gains? What about tax being paid by mutual fund houses? This article would focus on Mutual Fund Taxation for FY2017-2018 onwards.

Also Read: Best Tax Saving Mutual Funds to invest in 2018-2019

How Mutual Funds Returns are Taxed till now in India?


Many of the new investors think whether income from mutual funds are taxable or not. Here are the existing guidelines on Mutual Funds returns taxation till last financial year 2017.

1) Returns from sale Equity Mutual Funds held for < 1 year are short term capital gains – 15% of STCG is taxed.

2) Returns from sale of Equity Mutual Funds held for > 1 year are long term capital gains – Zero Tax on LTCG.

3) Returns from sale of mutual funds other than Equity Mutual Funds (like debt mutual funds) held for < 3 years are short term capital gains – Taxed based on individual tax in the year one gets STCG.

4) Returns from sale of mutual funds other than Equity Mutual Funds held for > 3 years are long term capital gains – 20% is taxed with indexation.

5) Dividends paid from mutual funds are tax free in the hands of investors. However there was no Dividend Distribution tax on mutual funds till now.

How Mutual Funds Returns are Taxed from 2018 in India?


Here are the guidelines on how mutual fund returns are taxed from now on from 2018 onwards.

Short Term Capital Gains: If an investor is selling equity mutual funds within 1 year, any returns arising are short term capital gains(STCG). The tax rate for STCG is 15%. Means one need to pay 15% of returns as tax for Mutual Fund Returns from STCG. Also an investor selling non equity mutual funds within 3 years time frame, it would be STCG and they need to pay 15% of returns as tax.

Long Term Capital Gains: Any equity mutual fund held for more than 1 year and then sold would fall under long term capital gain. Also any non equity mutual fund held for more than 3 years would fall under long term capital gains.  Long Term capital gain tax is 10% after getting exemption of Rs 1 Lakh from overall long term capital gain for equity mutual funds. For non equity mutual funds the Long Term Capital Gains (LTCG) tax rate is 20% with indexation. There is seperate computation to be done for Indexation.

How Equity Mutual Fund Returns taxed till 31st March, 2018


For equity mutual fund sold by 31st March, 2018, exiting capital gain guidelines wold apply. In case of long term capital gains i.e. these are tax free. However, any mutual fund scheme invested now, but sold after 31st March, 2018, new LCTG guidelines would apply. 

How Mutual Funds Returns are Taxed for Mutual Fund investments done prior to 31st January but sold after 1st April, 2018?


While mutual fund returns taxation indicated above is applicable from 1st April, 2018, any mutual funds invested prior to 1st February, 2018, but sold after 31st March, 2018, one need to assess based on their value as of the cut-off date.

Mutual Funds purchased prior to 31st January, 2018, one need to assess the value as on that date (Highest of (a) purchase value (b) value as on 31st January, 2018) to compute capital gains tax.

The above guidelines apply to resident Indians and NRIs too.

What about Taxation of Dividend from Mutual Funds?


Dividends received from mutual funds are tax free in the hands of investors. However mutual fund houses were not supposed to pay Dividend Distribution tax (DDT) earlier till few days back. However, here are the DDT payable by them from 2018 onwards.

1) DDT of 10% on Equity mutual funds

2) DDT of 25% on debt mutual funds.

3) For NRIs, DDT of 5% only is applicable for Infra Debt Funds. There is no change for other funds.

How Mutual Funds Returns are Taxed from 2018 in India? – Explained with some examples


Example 1 – How STCG are taxed on Equity Mutual Funds?


Mr.Ramakrishna purchased Equity Mutual Funds of Rs 10 Lakh on or before 31st July, 2017 (6 months prior to budget announcement date). The value of such mutual funds are Rs 12 Lakhs on 31st January, 2018. The acquisition value (as per finance bill 2018 it is highest of purchase value or deemed value as on acquisition of asset) and in this case it would be Rs 12 Lakhs.

If Mr.Ramakrishna sells all his equity mutual funds before 31st July, 2018 (< 1 year), short term capital gain of 15% to be paid. Assume that he sold at Rs 15 Lakhs. STCG is Rs 3 Lakhs (Rs 15 Lakhs minus Rs 12 Lakhs) and STCG Tax @ 15% = Rs 3 Lakhs x 15% = Rs 45,000.

Example 2 – How STCG are taxed on Non Equity Mutual Funds?


Mr.Sharath purchased Debt Mutual Funds of Rs 25 Lakh on or before 31st July, 2017 (6 months prior to budget announcement date). The value of such mutual funds are Rs 30 Lakhs on 31st January, 2018. The acquisition value (as per finance bill 2018 it is highest of purchase value or deemed value as on acquisition of asset) is Rs 30 Lakhs.

If Mr.Sharath sells all his debt mutual funds before 31st July, 2020 (< 3 year) for Rs 40 Lakhs, short term capital gains to be paid. Assume that he is in 20% Tax bracket, the STCG is at @20% of Rs 10 Lakhs (Rs 40 Lakhs minus Rs 30 Lakhs) = Rs 2 Lakhs.

Example 3 – How LTCG are taxed on Equity Mutual Funds?


Ms.Ramya purchased Equity Mutual Funds of Rs 20 Lakhs on or before 31st July, 2017 (6 months prior to budget announcement date). The value of such mutual funds are Rs 25 Lakhs on 31st January, 2018. The acquisition value (as per finance bill 2018 it is highest of purchase value or deemed value as on acquisition of asset) is Rs 25 Lakhs.

If Ms.Ramya sold all her equity mutual funds after 31st July, 2018 (> 1 year), long term capital gain of 10% to be paid after Rs 1 Lakh exemption. Assume that she sold at Rs 35 Lakhs. Gross LTCG is Rs 10 Lakhs (Rs 35 Lakhs minus Rs 25 Lakhs) and Net LTCG is Rs 9 Lakh (After Rs 1 Lakh exemption) and LTCG Tax @ 10% = Rs 9 Lakhs x 10% = Rs 90,000.

Example 4 – How LTCG are taxed on Non Equity Mutual Funds?


Ms.Pravallika purchased Debt Mutual Funds of Rs 10 Lakhs on or before 31st July, 2017 (6 months prior to budget announcement date). The value of such mutual funds are Rs 12 Lakhs on 31st January, 2018. The acquisition value (as per finance bill 2018 it is highest of purchase value or deemed value as on acquisition of asset) is Rs 12 Lakhs.

If Ms.Ramya sells all her debt mutual funds after 31st July, 2020 (> 3 years), long term capital gain of 20% (with indexation) to be paid. Indexation computation to be done to arrive LTCG and necessary tax to be paid.

Can we avoid or reduce Tax from Mutual Funds?


If you are in need of money in near term, go ahead and sell your mutual fund units before 31st March, 2018 as LTCG are tax free for equity funds. Otherwise, Mutual Funds are invested for long term, hence booking profits every year for Rs 1 Lakh exemption for LTCG is not advisable. You can play that for stocks and not for mutual funds. Here are some quick ways where you can reduce your tax liability.

1) Invest for long term of 8 to 10 years


One can invest for long term of 8 to 10 years atleast to get higher returns. Since you are investing for long term, the tax amount would be very small. E.g. if you are getting 15% annualised returns, your net returns could be 13.5% after taxation.

Also Read: Best Direct Mutual Fund Platforms to invest in mutual funds

2) Invest in diversified portfolio within Mutual Funds


What you are seeing today in midcap or smallcap mutualfunds? Many mutual fund house are selling midcap and smallcap stocks and buying large cap stocks. After few years, they would again invest in small stocks that are potential large cap stocks. This trend would continue. Hence invest in diverisifed portfolio containing large cap funds, midcap funds, smallcap funds and balanced funds. When a particular segment is performing well, you can start booking profits after say 10 years. This way you are always getting higher returns and your tax of 10% on LTCG would be low compared to what you are getting.

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Suresh

How Mutual Funds Returns are Taxed from 2018 in India

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