Mutual funds have recently surpassed all other investing options as the professionals and salaried classes’ preferred choice in India. Systematic Investment Plans are used by many people to make investments (SIPs). There were 2.4 crore SIP accounts in India as of the end of August 2018. Mutual funds can be broadly divided into two categories: For taxes purposes, mutual funds that invest more than 65% of their corpus in stocks are considered to be equity oriented.
For tax purposes, arbitrage mutual funds are considered as equity funds because they participate in arbitrage opportunities in the cash and derivative parts of the equity markets.
Other than equity-oriented funds, there are funds that are debt-oriented.
For taxation purposes, mutual funds and foreign funds (which invest in equities abroad)
International funds, which invest in foreign stocks, and fund of funds, a mutual fund strategy that invests in other mutual funds, are regarded as debt funds for tax purposes.
Mutual funds can be used to generate two significant sources of income.
- gains or profits from redeeming mutual funds, and
- a dividend from a mutual fund
Regarding the two types of funds, the taxability of these returns and incomes is covered below.
- Mutual funds focused on equity
- Equity fund investments that are redeemed within a year are considered to have made short-term capital gains and are subject to a 15% tax on any earnings or gains made.
- Contrarily, if you retain the mutual funds for more than a year before redeeming them, the
- Dividend from mutual funds received
Regarding the two types of funds, the taxability of these returns and incomes is explored in the following manner.
- Mutual funds that focus on equity
- The returns or gains on your equity fund investments are considered short-term capital gains and are subject to a 15% tax if you redeem them within a year.
However, if you keep the mutual funds for more than a year before redeeming them, the In contrast, if you retain mutual funds for more than a year before redeeming them, the gains or returns are considered long-term capital gains, and you must pay a 10% tax on any gains on equity investments that exceed Rs 1 lakh per year. If your earnings from such redemptions are less than or equivalent to Rs. 100,000, there is no tax.
Gains from mutual fund investments made before January 31, 2018, will not be subject to tax (grandfathering effect).
In the hands of the investor, dividends from equities mutual funds are tax-free. However, the Fund House (AMC) distributes this payout after paying dividend distribution tax (DDT). Consequently, the investor’s effective dividend is decreased by As a result, the investor’s effective dividend is decreased by 11.64%. (including surcharge and cess). As a result, investors receive a lower effective return on mutual funds.
Debt-focused funds
If you hold assets in debt funds or non-equity funds for less than three years, the profits on redemption are considered as short-term capital gains for taxes purposes. Your income is increased by short-term capital gains, which are then taxed in accordance with the applicable income tax bracket.
Returns on debt fund investments held for more than three years are treated as long-term capital gains for taxes purposes and are subject to indexation benefits of 20% after deducting the rate of inflation determined by the Consumer Price Index (CPI).
Dividends
Although dividends from debt funds are tax-free in the investor’s hands, they are subject to a 29.12% dividend distribution tax when paid out (including cess and surcharge). As a result, investors receive a lower effective return on mutual funds.
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