Tax Rule on Mutual Fund Gains

Indian retail investor continuously investing in equity market. The AMC (Asset Under Management) of all mutual funds are at record level. There are many new investors are looking to come in market with mutual fund route. In India there are following kinds of fund

• Equity Funds: Equity Funds are those that invest in equity shares of listed companies
• Arbitrage funds: Funds that trade through futures and options on the cash and futures sections of the stock market.
• Debt fund: Funds that invest in debt (fixed income securities such as Govt. Bonds, corporate bonds, Certificate of Deposits, Money market and call money) are called debt funds.
• Balanced Fund: Funds that invest in Debt instrument and Equity share are called Balanced Fund.
• Liquid Fund: these funds invest in very short term debt instruments having a maturity period of less than 91 Days.

Before choosing any fund we need to know the objective, lock-in, entry/exit loads and tax implications of that particular fund. Here we will discuss about the tax implications of these kind of fund.

Any fund who invests 65% of its value in equity shares or equity related instruments like futures and options are comes under one bracket. Any gain on the investment that are held for minimum 12 months treated as long term capital gain. It is applicable to both SIP as well as Lumsump. As per the policy, there is no tax is applicable on the long-term capital gains from equity funds. Balanced Fund with minimum 65% exposure to equity and Arbitrage fund also share the same benefit. If the investment are less than 12 months old then the gains are consider as Short term capital gain. The tax on short-term capital gains is applicable at 15% on the gains. 

Tax implications are different in case of Debt funds. Investments in debt funds are considered long term only if they are held for more than three years. In case of Debt fund, the long-term capital gain is taxed at the rate of 20 per cent. However, investors get the benefit of indexation on their original debt fund investment. This indicates that the adjustment of original investment is done in accordance for the price if inflation and taxes. Since the original cost of investment goes up after factoring in inflation, long term capital gains tax comes to negligible levels. If we redeemed our debt fund investment before 3 years then then short term gains will be taxed according to our tax slab.

If investors opt for dividend option while investing in equity mutual funds. Dividend income from all kinds’ funds is tax-free, irrespective of when you receive it. But one thing need to mention here that fund houses have to pay dividend distribution tax @ rate of 28.84 per cent (including surcharge and CESS), which reduces the yields.