This post discusses the Mutual Fund Taxation in India in more finer details. Don’t worry- no numbers here. I wish to equip you with changing times.
Mutual Fund taxation in India is a clear-cut issue. I am talking about the rates & incidence of Long & Short Term Capital Gains. But there is more to it. You must know a few more rules or pointers to fully know the taxations in mutual funds in India.
So here are the finer points and clarifications on MF Taxation
Mutual Funds Taxation in India
- For tax purposes, a mutual fund scheme has to clearly categorize in an Equity or a Debt Scheme. By definition, any scheme that invests 65 percent or more of its portfolio in equities or equity-related instruments, is considered equity funds.
Implication: This is the reason all hybrid funds, Balance Advantage funds & Arbitrage funds keep 65% of average assets in equity or equity-related (Arbitrage, Future & Options)at all times. So even certain dynamic funds have the mandate to go 0% in Equity or Debt, but when it comes to equity they go in arbitrage securities instead of a debt security like or equity corporate bond. Off course equity taxation is better than debt.
- Apart from equity diversified funds, certain hybrid funds, arbitrage funds & equity savings funds are also considered equity funds. They invest in equity (Cash or arbitrage)and derivatives such as futures and options to ensure 65% of the portfolio is in equity securities.
- Any gain from equity mutual fund (SIP or lump sum) held for more than 12 months is considered as a long-term capital gain. For period less than 12 months, short-term capital gains tax is applicable.
- Any gain for Debt mutual fund (SIP or lump sum) held for more than 36 months is considered as a long-term capital gain. For periods less than 36 months, short-term capital gains tax is applicable.
- In the case of Merger or Re-Categorization, the calculation of 12 months or 36 months is counted from the date of original investments. So suppose scheme A which was a Debt scheme changed to scheme B after 30 months of launch. If a unitholder who invested in scheme A at launch can claim long-term capital gain by staying invested for 6 more months in scheme B.
- In the case of Units acquired due to death in the family as redistribution or transmission, the capital gain period will be calculated from the date of investment by the deceased and not by the acquirer.
- Indexation is allowed for Debt Mutual Funds only while considering long-term capital gain tax.
- NRIs will have TDS deduction whether they withdraw or switch from one mutual fund to another. If they opt for STP, the debt scheme will attract TDS.
- Many investors opt for dividend option while investing in equity mutual funds. Dividend income from Equity Mutual Funds & Debt Mutual Fund is tax-free, irrespective of when you receive it. The dividend comes as net after deducting Dividend Distribution Tax.
- Gold Funds and Fund of Funds (FOF) are considered as Debt Category. This is funny sometimes as there are FOF which invest in equity funds or international equity funds. But then also they are considered as DebtInvestments.
- Dividend Distribution Tax (DDT) cannot be claimed back like other Tax Deducted at Source (TDS).
- An ELSS SIP units cannot be redeemed in 3rd Year of SIP. Units work on the principal of FIFO (first in first out). So every contribution should be locked in for 3 years. So for a 3 year SIP in ELSS, the last units will be free in the 6th year.
- Update by Our Reader Mr Tanmay Agarwal: With the Exit Load (If Any), the Capital Gain Taxation also works on FIFO Basis. This means every installment needs to complete 12 months in Equity or 36 Months in Debt MF to Qualify for LTCG. – A very good feedback from him, hence adding this update.
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Hope you will take care of these fine points while ascertaining tax benefits of mutual fund taxation in India. Do let me know what you feel about this post in the comments section below.
Wish to Read Some more Advanced Details on Mutual Fund Taxation in India for FY 2019-20. Click Here
If you have any question feel free to reach out to me using the comments section below or my email madhupam@thewealthwisher.com.
Mutual Fund taxation is also subject to changes by the regulator. Please consult your tax consultant before making a decision based on the information produced here.
