In one of my previous videos & blogs on Mutual Funds, I discussed about Mutual Funds Fees and Expenses and the impact they have on the returns. However, mutual fund fees and expenses are exclusive to the fund itself, but what about the implications of tax on returns?
How are mutual funds taxed?
Whenever you make a profit from mutual funds, it is supposed to be taxed. There are two types of “profit.” When you sell your mutual fund units for more than you paid, that is a profit called “Capital Gains”. Then there are “Dividends”, a part of mutual fund house profit shared with investors based on the amount of units they own. All of these profits are taxed by the government, but how much is determined by certain factors. Let us first understand Dividend Taxation.
Taxation on dividends
Dividends from mutual funds are taxed based on your income tax slab rate. This change came after the Union Budget 2020, which ended the Dividend Distribution Tax (DDT) that companies used to pay. Now, dividends are directly added to your taxable income, and you’ll pay tax according to your income bracket. For example, if you fall under the 15 lakhs tax bracket, your dividends will be taxed at 30%. This applies to all types of mutual funds, including equity, debt, and hybrid funds.
Taxation on Capital Gains – Capital Gains
Here’s the thing—how long you hold onto your mutual fund matters for taxes.
- Short-Term Capital Gains (STCG): If you sell your equity fund within a year, you pay 15% of the profit.
- Long-Term Capital Gains (LTCG): Hold it for more than a year, and you only pay 10% on profits over ₹1 lakh.
For Debt Funds, because of the updated rule, all gains are taxed according to your income slab, no matter how long you hold them.
What about SIPs?
SIPs, or Systematic Investment Plans, are a popular way to invest in small amounts at a time. But when you sell, each SIP installment is treated separately. So, if you’ve been investing monthly for a year, the first month’s units might be taxed as long-term, but the later ones could be short-term.
A tiny extra tax: STT
Lastly, there’s something called the Securities Transaction Tax (STT). This is a very small tax—just 0.001%—that you pay when buying or selling equity or hybrid fund units. It’s tiny, but it’s good to know!
Conclusion
And that’s it! The basics of mutual funds taxation in India. Remember, the longer you hold onto your investments, the less tax you’ll pay on your profits. If you’re getting used to this, don’t hesitate to ask a tax expert for help.