Mutual fund taxation
Similarly, in mutual funds there are short-term capital gains and long-term capital gains and also type of funds.
So, let’s understand first what is short-term capital gains and long-term capital gains on mutual funds.
Whereas in debt mutual funds, if the holding period is less than 36 months (3 years) it is called as short-term capital gains.
And in the case of debt mutual funds, if you’re holding this fund for more than 36 months (3 years) it is called as long-term capital gains.
| Funds | Short-term | Long-term |
| Equity funds | Less than 1 year | More than 1 year |
| Balanced funds | Less than 1 year | More than 1 year |
| Debt funds | Less than 36 months | 36 months and more |
1.Equity mutual funds:
In equity mutual funds, long term capital gain is tax @ 10% if your returns on equity mutual funds are more than 1 lakh.
For example, if your return on equity mutual funds is 1.5 lakhs then 10% LTCG is charged. But the tax will not be charged on 1.5 lakh, it will be charged on the 50,000.
1,50,000 – 1,00,000 = 50,000
50,000 * 10% = 5,000
In short, you have to pay long term capital gain tax on the amount of 50,000.
Whereas the short term capital gain is charged @ 15% if you’re selling the mutual funds within 1 year.
On debt funds the long term capital gain is charged @ 20% after indexation.
Indexation is a method of reducing the capital gains by factoring the rise in inflation between the years the fund was bought and the year when they are sold. The longer the holding period, the higher are the benefits of indexation.
In case of short term capital gain, if the holding period is less than 36 months then the profits will be added to your income which is subject to taxation as per your income tax slab.
Balanced funds are taxed as same as equity mutual funds because the balance funds are equity-based hybrid funds that invest at least 65% of its assets in equities.
In Balanced funds, if the holding period is less than 1 year, then it is called as short-term capital gains.
Long term capital gain means if you’re holding the balanced funds for more than 1 year then it is called as long-term capital gains.
Equity linked saving scheme is an open-ended equity mutual fund with income tax benefits under Section 80C of the Income Tax Act up to 1,50,000.
ELSS comes up with the lock-in period of 3 years which means you’ll not be able to redeem your units before completion of 3 years. After the completion of lock-in period, you’ll have to pay LTCG as similar as equity funds which is 10% if your profits are above 1 lakh.
SIP is a mode for investing your money in mutual funds. SIP allows you to invest a certain pre-decided amount at a regular interval i.e. weekly, monthly, and quarterly, etc. Each SIP is treated as fresh investment and are taxed separately.
For example, if you are investing 5000 per month in equity funds, then each month will be considered as separate investment.
Suppose you bought your first equity-based SIP in January 2018 and consequently SIPs in the upcoming months. Then by the end of Jan 2019, then only the first investment will be considered as long-investment.
The other investment is for a period of fewer than 12 months and hence, you have to pay an STCG Tax of rest SIPs if you redeemed all of them in Jan 2019.
6.Securities transaction tax:
STT of 0.001% is only charged on equity fund and balanced fund. It is charged by the fund managers when you decide to sell your units of an equity fund and balanced fund. The STT is not charged on sell of debt funds.