A successful investment plan should always consider the net gain out of the investment. To calculate your profit, you have to understand the applicable taxation rules.
When it comes to a mutual fund, your income tax will be evaluated on the type of fund you hold, debt or equity. If there are 65% or more assets under management then, the fund is considered to be equity.
The taxation will be based on your income from the mutual fund. There are mainly two types of income that you can have from mutual funds. Capital gains and dividends. Capital gains indicate the difference between what the investor had spent and what he gained after selling the mutual fund.
Dividends are payouts after the tax deduction is done by the fund management company. This is called the dividend distribution tax.
Capital gains taxation
This type of taxation is determined by the tenure of the holding of mutual funds. It can either be a short Term Capital Gains Tax (STCG) or a Long Term Capital Gains Tax (LTCG).
| Type | Tax |
| Equity (holding more than 12 months) | 10% ( Exemption up to 1 lakh per anum) |
| Equity up to 12 months | 15% |
| Non-equity ( tenure of more than 36 months) | 20% after it gets indexed |
| Non-equity up to 36 months | Investors personal slab will be applicable |
Dividend distribution tax
The taxation for dividend distribution for mutual funds in India is currently 15%. However the applied rate 20.3576%, comprising of 12% surcharge and 3% education cess. If the dividends cross 10 lakhs per year then an additional 10% charges are levied. However individual investors can enjoy tax-free dividends. The fund management company pays the taxes on behalf of the investors.
Loss adjustment
There is a scope to write off any previous loss and pay taxes on the net gain only. In fact, you can carry forward losses incurred in a year for 8 consecutive financial assessment years. The loss adjustment also depends on the tenure of your policy.
Taxation on systematic withdrawal funds
The systematic withdrawal plan is an effective way to reduce your tax liability. Though the taxation rates are similar to what is applicable to equity and debt funds, the benefit occurs as inflation indexing takes time to happen.
Tips to avoid extra taxation
To evade unnecessary taxation on mutual funds, financial advisors suggests, avoiding frequent withdrawals. Another tip to follow is to take benefit of the 1 lakh tax exemption on long term equity funds and arrange your investment portfolio accordingly.
Securities transaction tax
For equity mutual funds a rate of 0.001% is deducted as a Securities Transaction Tax (STT).
Tax exemption
Section 80C of The Income Tax Act allows a tax deduction of 1.5 lakhs per anum under the Equity-Linked Savings Scheme (ELSS). However, the funds will have to be fixed or locked for a duration of 3 years.
If you are confused about how much you will gain from your mutual fund’s investment, use a mutual fund return calculator from sites like Kotak securities.