Taxation of Mutual Fund Schemes

Mutual funds are structured like trusts and they themselves are exempt from taxes. However, individual investors and the trustee company are liable to pay taxes on the profit made on the investment. Taxability of capital gains and treatment of capital losses is different for equity and debt oriented schemes. Securities Transaction Tax (STT) is levied on investments in equity oriented mutual fund schemes. Similarly Dividend distribution tax is applicable on dividends paid by debt oriented mutual fund schemes.

 


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Setting of capital losses against capital gains and other income is subject to limitations to prevent fraudulent tax avoidance. Tax treatment also varies for short term and long term capital gains. If investment period is up to 1 year investment is considered short term. There is no Tax Deducted at Source (TDS) on dividend payments or re-purchase payments for resident investors. There is no Wealth Tax for investment in mutual fund units including Gold ETF. Tax treatment of various mutual fund schemes is described below:

Equity Oriented Mutual Fund Schemes

These are the schemes in which at least 65% of the asset is invested in the shares of domestic companies. Investment in these schemes is subjected to STT and the rates applicable are described in the table below for individual investors. Additional to this the mutual fund house also pays STT when it buys/sells stocks in the stock market for its portfolio.

Product

Transaction

STT rate

Equity Oriented Mutual Fund Unit

Purchase

0.125%

Equity Oriented Mutual Fund Unit

Sell

0.125%

Equity Oriented Mutual Fund Unit

Repurchase

0.25%

 

Debt Oriented Mutual Fund Schemes

Taxes are levied on the dividend distributed by debt oriented mutual fund schemes. Rates for dividend distribution tax (DDT) for individuals and corporate are shown in the table below.

Dividend Distribution Tax  

Individuals / HUF

Corporate/Others

Equity Schemes

NIL

NIL

Debt Schemes

12.5%+Surcharge+ Education Cess

30%+Surcharge+ Education Cess

Liquid Schemes

25%+Surcharge+ Education Cess

30%+Surcharge+ Education Cess

 

STT is not applicable in the case of debt oriented schemes.

 

Capital Gain Tax

Additional to the above taxes mutual fund profits are also subject to capital gain tax. Capital gain is the difference between the sale price and the acquisition price of the asset. Tax treatment is different for different holding period (long term or short term). Tax details are given in the table below.

Capital Gains Tax

Equity Schemes

Non-Equity Schemes

Long Term Capital Gain Tax

NIL

Lesser of 10% without indexation or 20% with indexation + surcharge and education cess

Short Term Capital Gain Tax

15%

Added to total income and taxed as per the slab

 

In case of capital loss

In case of capital losses incurred on once investment these losses can be set off against other capital gains leading to lesser tax outgo. However there are some limitations to this rule so as to restrict fraudulent tax avoidance. Various capital losses and the head against which you can set it off are described in the table below.

Capital Loss

Set Off Against

Short Term

Long Term / Short Term Gain

Long Term (Debt Oriented)

Long Term Gain (Debt)

Long Term (Equity Oriented)

Cannot be Set Off

 

Word of Caution

Tax rate keeps on changing (STT has been reduced from next financial year) hence you are advised to consult Income Tax website for updated rates to avoid faulty calculation.

 

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