How Mutual Funds are taxed in 2019-2020 in India?
One of the best ways to save and grow your money in investing in mutual funds. Earlier, returns from Equity Mutual Funds used to be tax free for over 1 year. However, such tax benefits are not available any more. If you can understand how mutual funds are taxed, you can plan your mutual fund investments in a better way. How Mutual Funds are Taxed in 2019-2010 in India? What are some of the best ways to reduce income tax on your mutual fund returns? We would provide some insights about mutual funds taxation in this article.
What are mutual funds?
You can skip this section if you are already aware about mutual funds.
Mutual funds are one of the investment vehicles through which the funds of the investors are pooled together to be invested in stocks, bonds and other equity and debt instruments by professionals. As an investor, you can buy mutual fund units that denote your share in the particular mutual fund scheme. The AMCs (Asset Management Companies) offers investors a wide range of portfolio to invest in. A portfolio consists of a mixture of stocks and debt instruments which decides the nature of the portfolio.
There are two ways of investing in mutual funds:
Lump sum investment – It is a one shot investment in which the entire amount of investment is invested in a single go.
SIP – SIP or Systematic Investment Plan is an arrangement in which a pre-determined sum of amount is to be invested at a regular interval say daily, weekly, monthly, quarterly, etc. The amountis as low as Rs 500 per month.
What are the factors that would determine Mutual Funds Taxation in 2019?
Mutual funds returns are not taxed at uniform rates. The applicable tax-rates depends upon the following three factors:
a) Types of Mutual Fund Investments
The type of mutual fund plays an important role in deciding its tax rate. There are two types of funds – equity oriented mutual funds and non-equity mutual funds. The mutual fund scheme that invests at least 65% of its fund Corpus in equity and equity related instruments are known as equity mutual funds. The examples of such funds are large cap, ELSS tax saving funds, etc. The mutual fund scheme that hold less than 65% of their portfolio in equities and equity related instruments are known as non-equity funds, also known as debt funds. The examples for the same are debt funds, gold fund, infrastructure fund etc.
(b) Tenure of Mutual Fund investments
When you redeem or sell your mutual fund units and make any profit/ loss, it is referred to as a capital gain or loss. It can be of two types -short term capital gain (STCG) or long-term capital gain (LTCG) depending upon the period of your holding. The tax rate that is applicable on these profits is known as a capital gains tax.
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(c) Your residential Status
The capital gain tax rate is determined on the basis of residential status of an individual which can be either a resident Indian or Non-Resident Indian (NRI). The tax-rate at which the mutual funds are to be taxed to both such status are different.
What is Short Term Capital Gain in mutual funds?
If you hold your equity mutual fund scheme (including balanced funds) for less than 1 year and realize profit out of it, the profit will be called as short term capital gain and if you hold a debt fund for less than 36 months and make a profit out of it, it will be treated as short term capital gain.
What is Long Term Capital Gain in mutual funds?
When an equity mutual fund (including balanced funds) investment has been held for over one year and you make a gain on your investment in scheme, it is classified as long term capital gain. If you hold a non-equity mutual fund for more than 3 years and make a profit on it, it is also known as long term capital gain.
How Equity Mutual Funds are taxed in 2019-2020 in India?
There are differential rates of tax for equity mutual funds and debt mutual funds for long term and short term.
1) The income tax rate of short-term capital gain (STCG) on equity funds is 15%.
2) The long-term capital gain (LTCG) on equity funds is 10% if it’s exceeding Rs 100,000. However, LTCG from equities are exempt up to Rs 100,000 in a financial year.
Let me explain on how returns from equity mutual funds are taxed
Mr.Rajesh invested in equity mutual fund schemes in Feb-2018 for Rs 10 Lakhs which have grown to Rs 11.1 Lakhs now i.e. Rs 1.1 Lakh Profits. Means the investments have just crossed 12 months now. If Mr.Rajesh is redeeming/selling such mutual funds now in Mar-2019 (>12 months), such returns are long term capital gains and taxed at 10% over and above Rs 1 Lakh exemption. The taxation on such gains are (Rs 1.1 Lakhs profit – Rs 1 Lakh exemption) x 10% = Rs 1,000. Mr.Rajesh need to pay Rs 1,000 as income tax for FY2018-2019 (Assessement Year 2019-2020) on such profit of Rs 1.1 Lakhs.
How Debt Mutual Funds are taxed in 2019-2020 in India?
1) The long-term capital gain tax rate on debt funds is 20% with indexation benefit.
2) The short-term capital gain on non-equity funds is according to the investors Income Tax slab rate.
How SIP returns are taxed in FY2019-2020 in India?
Each and every SIP investment is treated as separate investment, hence tax treatment would not be same for the returns what you get when redeemed.
For example, you start a SIP of Rs 10,000 a month in an equity mutual fund for 12 months. Each individual SIP is considered as fresh investment. After 12 months, if you decide to sell your entire mutual fund units, gains will not be tax-free. Only the profits earned on the first SIP would be tax-free because only that investment would have completed one year. The rest of the profits would be subject to short-term capital gains tax.
Let me explain this with below simple table for mutual funds taxation for equity funds, debt funds, ELSS funds and debt funds
What is Dividend Distribution Tax which is paid for dividend distributed by mutual funds?
Here are the tax rates for dividend distribution tax (DDT).
a) On Debt funds DDT is at the rate of 25% (29.12% including surcharge and cess).
b) Equity mutual funds were exempt from DDT earlier. However budget 2018 introduced, tax on equity oriented mutual funds at the rate of 10% (11.648% including surcharge and cess).
c) The dividend received by investors is exempt in the hands of the fund holder. Means you need not pay income tax separately if you got dividend from mutual fund schemes.
How Mutual Funds are taxed in 2019-2020 for NRIs in India?
NRIs can invest in Mutual Funds in India. NRI investors often fear that they will have to pay double tax when they invest in India including mutual funds. That is certainly not the case if India has signed the Double Taxation Avoidance Treaty (DTAA) with the respective country. For instance, India has signed this treaty with the US. Hence, you can claim tax relief in the US, if you have already paid taxes in India.
When an NRI invests in mutual funds, it attracts TDS at the time of redemption at the following rates-
1) STCG in equity-oriented mutual fund is taxed at 15%.
2) LTCG in equity-oriented mutual fund is taxed at 10%.
3) STCG in debt-oriented mutual fund is taxed at 30%.
4) LTCG in debt-oriented mutual fund is 20% in listed funds with indexation and 10% without indexation benefit.
Please note that the capital gain is taxed along with the applicable surcharge and Education Cess will be deducted at the time of redemption of mutual fund units.
It is a bit technical to decide for the tax rates at which the profits realized by the mutual funds to be taxed. Be alert and vigilant in planning for your next financial year.
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How Mutual Funds are taxed in 2019-2020 in India