Are Mutual Funds Taxable

Mutual Fund investments are subject to capital gains tax. It’s paid on the profit we make while redeeming / selling our Mutual Fund holdings .

by Akash Jha updated July 6, 2023, 12:20 AM 22 Views

When considering a mutual fund investment, most people forget about one crucial factor: taxes. Mutual fund investors typically don’t realize that they may be subject to taxation. This post will shed light for you if you’re in the same league as the author. In this article, we’ll examine whether or not mutual funds are taxable, as well as the various tax ramifications that could apply to your holdings.

Are Mutual Funds Taxable?

Yes. The returns from a mutual fund are considered to be capital gains under the Income Tax Act of 1961 and are taxable in the hands of the investor. That’s not all. Even dividends that investors receive from a mutual fund are liable for taxation.

Tax on Dividends Arising From a Mutual Fund

Now that you know mutual funds are subject to income tax, let’s look more closely at how dividends are taxed.

Union Budget 2020 states that dividends from stocks and mutual funds are to be included in your taxable income under the heading “Income from Other Sources,” and taxed at your marginal income tax rate. If, for example, your salary puts you in the 20% tax bracket, that percentage will also be applied to any dividends you receive from your mutual fund..

Tax on Capital Gains Arising From a Mutual Fund

Returns on mutual fund investments are considered capital gains under the Income Tax Act of 1961, as we have seen above.

However, depending on whether the gains are short-term or long-term, a different tax rate may apply. Capital gains are classified differently depending on variables such as the type of mutual fund purchased and the length of time the investment was held.

The following table should greatly improve your comprehension of the subject matter.

Mutual Fund	Short-Term Capital Gains	Long-Term Capital Gains
Equity Mutual Fund and Equity-Focused Hybrid Fund	If the holding period is less than 12 months	If the holding period is 12 months or above
Debt Mutual Fund and Debt-Focused Hybrid Fund	If the holding period is less than 36 months	If the holding period is 36 months or above

Tax on Equity Fund Capital Gains

Equity mutual funds are those that invest more than 65% of their assets in equities. Gains on equities funds held for a short period of time are subject to a 15% tax rate.

While short-term capital gains are subject to taxation, long-term capital gains from equities mutual funds are exempt up to Rs. 1 lakh every fiscal year. However, capital gains above Rs. 1 lakh would be taxed at a flat rate of 10%.

Tax on Debt Fund Capital Gains

Debt mutual funds are those that invest more than 65% of their assets in debt securities. Any profits you make from selling debt funds too soon are considered ordinary income and subject to taxation at your personal rate.

Gains from holding debt mutual funds for more than a year are subject to a flat 20% tax rate. However, indexation works to your advantage.

Tax on Hybrid Fund Capital Gains

Whether a hybrid fund’s focus is on equities or bonds affects how its capital gains are taxed. Hybrid funds with an emphasis on equities would be taxed in the same way as equity funds. The tax treatment of debt-focused hybrid funds is equivalent to that of debt funds.

Securities Transaction Tax (STT) on Mutual Funds

Units of stock mutual funds and equity-focused hybrid funds are subject to Securities Transaction Tax (STT) in addition to income tax on mutual funds. Your share of STT will be 0.001%. Unit sales of debt mutual funds are exempt from the Securities Transaction Tax.

Conclusion

Everything you need to know about paying taxes on mutual funds is now at your fingertips. You may also see that the longer you keep the mutual fund, the less tax you will incur. You should invest in mutual funds with the intention of holding them for the long term.

However, a trading and demat account is required to invest in a mutual fund. Motilal Oswal allows you to open a Demat account and a trading account in a matter of minutes, at no cost to you. After signing up, you’ll have access to Motilal Oswal’s powerful trading platform, where you may purchase shares of publicly traded companies and mutual funds.