Investing in mutual funds seems interesting nowadays. It is considered the best source of wealth creation and passive income but often we forget the implications of taxes on mutual funds.
Understanding taxation on mutual funds can be a strategic move in your investing journey. The government of India has made several changes in the taxation of MFs in the budget 2024. Let’s dig deep and understand the taxation on mutual funds in this blog.
Types of Mutual Funds:
Understanding different types of mutual funds can help us in breaking down taxes easily. There are three types of mutual funds.
- Equity-Oriented Mutual Funds: These are those mutual funds where most of the investments are done in equity shares or bonds. If your mutual fund advisor invests 65% or more than 65% of the fund’s amount in equity or equities-related securities then it is called Equity-Oriented Mutual Funds.
- Debt-Oriented Mutual Funds: These are those funds where most of the investments are done in fixed-income securities like debentures or treasury bills. If your mutual fund advisor invests 65% or more than 65% of the fund’s amount in fixed-income securities then it is called Debt-Oriented Mutual Fund.
- Hybrid Mutual Funds: These are those mutual funds where most of the investments are invested in both debt and equity-based securities. The investing criteria can be 40%-60% in equity and 60%-40% in debt.
Factors Affecting Mutual Funds Taxation:
The government plans to tax mutual funds in different ways. Those ways are:
- Capital Gains: If you are profiting on mutual fund investment then the government will tax you on the profits. There are two types of capital gains: Long-term capital gains (LTCG) and Short-term capital gains (STCG).
- Duration: The duration of holdings also defines your taxation. There can be two types of duration: Long-term and Short-term.
- Fund Type: Taxation also depends on the funds that you hold. The funds MFs are: Equity-oriented, Debt-oriented, and Hybrid-oriented.
Tax on Equited-Oriented Mutual Funds:
Taxation on equity-oriented mutual funds depends on many factors such as:
- Short-term capital gains (STCG):
If you incur gains on selling a fund that you hold for less than 12 months then it is considered as short-term capital gains. The Government taxed these gains at 20% flat.
- Security Transaction Tax (STT):
These taxes are applied to the transaction i.e. buying or selling of mutual funds. If you sell a mutual fund then you have to pay an STT of 0.001%.
- Long-term capital gains (LTCG):
If you incur gains on selling a fund that you hold for more than 12 months then it is considered as long-term capital gains. The government taxed these gains at 12.5% flat.
Note: Under Long-term capital gains, according to the union budget 2024 it is considered that profits up to 1.25 lakhs will be tax-free. Taxes will be applied on profits higher than 1.25 lakhs.
Tax on Debt-Oriented Mutual Funds:
Taxation on Debt-oriented mutual funds depends on these factors:
- Short-term capital gains:
The STCG gains are taxed according to the income tax slab rate.
- Long-term capital gains:
The LTCG gains are taxed according to the income tax slab rate.
Note: There is no holding period under a debt-oriented mutual fund. The concept of long-term and short-term does not apply in this fund. The exemption limit also does not apply here.
Tax on Hybrid-Oriented Mutual Funds:
These funds are treated as Debt MFs by the government that’s why the taxation of this fund is the same as the taxation of Debt mutual funds.
Key considerations:
- It is advised that you should always declare your holdings, capital gains, or loss in your Income Tax Return. Proper disclosure is mandatory as it makes your investment liable for any exemption if applicable.
- Cess and charges are applicable on both STCG and LTCG.
Conclusion:
Understanding tax implications is mandatory as it provides us with an idea to plan better and invest wisely. By calculating your risk tolerance, investment horizons, and tax bracket you will be able to make wise decisions and can increase your portfolio’s efficiency.
Even after this, if you have any queries regarding any of your financial decisions then you can contact Divadhvik: Your own financial friend.
