1. How Mutual Funds are taxed?
Mutual funds are taxed when they are sold. The profit/gain portion of the sales is considered as capital gain. Tax is calculated on this gain only.
There are two types of capital gain – Short term and Long term capital Gain.
2. Taxation of Equity Mutual fund:
Equity mutual funds are mutual funds, which primarily invest in stocks to get the benefit from rising stock prices in the capital market. The returns on equity mutual funds are in the form of dividends as well as capital gains.
Funds, where equity holding is more than 65% of the total portfolio, are classified as equity funds for taxation.
a. Short Term Capital Gain (STCG):
When the equity-oriented mutual funds are sold within 12 months from the date of purchase, it results into the Short Term Capital Gain/ Loss. Short term capital gain is taxed @ of 15%.
Mr. A has purchased 100 units of IDFC value fund, for Rs. 400 per unit, in January 2018. He sold these 100 units on August 2018. What will be the tax implication of capital gains in such case?
NAV on date of sale was Rs. 450
Mr.A has held the Mutual fund units for a limited period of 8 months, thus he will be liable for payment of STCG (Short-Term Capital Gain) on sale of such listed shares (the capital asset in this question).
Computation of STCG:
b. Long Term Capital Gain (LTCG):
Till FY 2017-18 Equity-oriented funds had no tax on long-term capital gains; But things have changed after budget of 2018. Finance minister introduced the long -term capital gains tax (LTCG) of 10 % on Equity MF on gains of over ₹1 lakh per annum without allowing the benefit of indexation. If you have long term gains/profits before 31st Jan 2018, then you don’t have to pay taxes on them.
Janak has purchased the units of ‘Dinesh and Company’ for Rs. 10,000 and sold for Rs. 12,000. The FMV as on 31st January 2018 is Rs. 11,000.
Computation of LTCG:
Some more examples :
3. Dividend Distribution Tax:
As proposed in Budget 2020, companies will not be required to pay Dividend Distribution Tax (DDT). Dividend income from mutual funds is now taxable in the hands of the recepient at applicable income tax rates.
4. ELSS or Tax Savings Mutual Funds:
ELSS is a type of diversified equity mutual fund. Person can claim 80C deduction of amount invested in ELSS (but maximum upto Rs 1.5 lakhs). But this mutual fund has a 3 yrs lock-in period. Earlier there was no tax on sale of ELSS but after the introduction of LTCG tax in budget 2018, LTCG will be taxed @ of 10 % if gain exceeds Rs.1 lakh
STT- Securities Transaction Tax (STT) is a type of direct tax. It is governed by STT Act. It is payable on the value of transactions transacted on NSE or BSE.
Let's understand the basic terms used in computation of Capital Gain.
i. Cost of Acquisition (COA) (For calculation of LTCG on sale of mutual funds):
For equity mutual fund held for less than 12 months (short term assets) – Actual purchase price
For equity mutual fund held for 12 months or more (long term assets)-
Here, we need to follow a Two Step process-
Step 1 - Find Lower of Fair Market Value (FMV as on 31st January 2018) and Sale Price
Step 2 - Higher of the actual COA and Answer in Step 1
ii. Sale Price / Redemption amount:
It is the price at which mutual fund units are sold.
iii. Computation of Capital Gains in such case
Capital Gains (LTCG) = Sale price Less COA.