CALCULATION OF CAPITAL GAINS IN MUTUAL FUNDS.

Mutual Funds can provide earnings in the form of interest, dividends, or capital gains. While capital gains are taxable and the tax you will be required to pay on capital gains depends on the duration for which you stay invested in the security. This duration is called the holding period of mutual funds. The tax on mutual funds dividends, called Dividend Distribution Tax (DDT) is paid by the fund house (Asset Management Company) on behalf of the investors.

WHAT IS MUTUAL FUND CAPITAL GAIN TAXATION?

A capital gain refers to the difference between the value at which an investor purchased the units of a mutual fund scheme and the value at which he/she sold or redeemed those units of a mutual fund scheme.

The mutual funds capital gains taxation depends on the type of mutual fund scheme and the investment tenure. On the basis of investment tenure, there are two types of capital gains tax.

1. Short Term Captial Gains Tax (STCG) - Equity or balanced funds are short-term investments if the holding period is less than 12 months. Debts funds are also viewed as short-term securities if the holding period is less than 36 months. Hence, short-term capital gains taxes apply to any income generated from securities held for less than 36 months or 3 years.
2. Long Term Captial Gains Tax (LTCG) - In case of equity mutual funds and balanced mutual funds, a holding period of 12 months or more is regarded as long-term. So, long-term capital gains tax or LTCG applies to those investments. However, in the case of debt funds, the investment is considered long-term if the holding period is 36 months or more.                                                                                                                                                                                                                                             

   SCHEME	SHORT TERM CAPITAL GAIN TAX		LONG TERM CAPITAL GAIN TAX
   	HOLDING PERIOD	TAX RATE	HOLDING PERIOD	TAX RATE
   EQUITY ORIENTED SCHEMES	LESS THAN 12 MONTHS	15%	12 MONTHS OR MORE	10%
   NON-EQUITY ORIENTED SCHEMES	LESS THAN 36 MONTHS	INCOME TAX SALB RATE OF INVESTORS	36 MONTHS OR MORE	20% AFTER INDEXTION

ILLUSTRATION:

Let’s understand with the help of an example. For instance, Mr. X invested Rs. 100 in a debt fund in FY 2015-16 and sold it for Rs 150 in Fy-2018-19. Since Mr. X sold it after 3 years, the gain is long term and an LTCG tax of 20% with indexation is applicable. The CII in FY16 was 254 and in FY19, it was 280. As a result, Mr. X’s purchase price for tax purposes will be raised to (280/254)*100 = 110 and his taxable gain will be 150 – 110 = 40 (Long-term capital gains on equity mutual fund are exempt up to Rs. 1 lakh per annum). The tax payable will be 20% of 40 = Rs. 8 and not Rs. 10 (20% of 50).

• Capital losses incurred on a mutual fund scheme can be adjusted against the capital gains earned on another mutual fund investment of the same year. This set-off cannot be done against any other head of income.

• Short term capital losses can be adjusted against both long term and short term captial gain. However, long term capital losses can only be adjusted against long term capital gains.

Tax Benefit of Mutual Funds:

a. Tax-Saving Equity Funds

Equity-Linked Saving Scheme (ELSS) is the most efficient tax-saving instruments under Section 80C. These diversified funds invest in equity shares of various companies across market capitalization. ELSS comes with a lock-in period of 3 years. You will not be able to redeem your units before the completion of 3 years. Post redemption, you will have access to long-term capital gains (LTCG) up to Rs 1 lakh, which are tax-free. LTCG over Rs 1 lakh is taxable at the rate of 10% without the benefit of indexation.

b. Non-Tax Saving Equity Funds

Long-term capital gains (LTCG) on non-tax saving equity funds up to Rs 1 lakh is free of taxation. LTCG above Rs 1 lakh is taxable at the rate of 10% without the benefit of indexation.

Furthermore, there is a 15% tax (surcharge and cess as applicable) on short-term gains from equity funds upon redemption of units before the completion 12 months.

c. Debt Funds

Long-term capital gains on debt fund are taxable at the rate of 20% after indexation. Indexation is a method which involves factoring the rise in inflation from the time of purchase to sale of the units.

Indexation allows inflating the purchase price of debt funds to bring down the quantum of capital gains. You are required to add short-term gains from debt funds to your overall income. They are subject to short-term capital gains tax (SCGT) as per the income tax slab you fall under.

d. Balanced funds

Balanced funds are equity-oriented hybrid funds that invest at least 65% of their assets towards equities. The tax treatment on balanced funds is precisely the same as non-tax saving equity funds.

e. SIPs

A SIP or a systematic investment plan invests a fixed amount in a mutual fund in a periodic manner. The SIP can be daily, weekly, fortnightly, monthly, or even quarterly. As detailed above, gains from SIPs are taxable as per the type of mutual fund you invest in and its holding period. Each SIP, treated as a new investment, attracts taxes on its gains separately.

f. Securities Transaction Tax (STT)

A Securities Transaction Tax (STT) is applicable at the rate of 0.001% on equity oriented mutual funds at the time of redemption of units. An investor is not required to pay STT separately as it is deducted from the mutual fund returns.

Thus, the longer you hold onto your mutual fund units, the more tax-efficient they become. The tax on long-term gains is comparatively lower than that of the tax on short-term gains.

Hence invest in right mutual fund by the help of GIIS Financial and save your taxes.

You can use GIIS Financial tools or Our Android App  for Investment, tracking and Asset allocation planning. 

*Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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