Overview of Taxation on Mutual Funds in India

Just like most financial products, mutual funds earnings are also taxed under the Indian taxation system. The tax on the mutual fund is calculated based on the following three factors primarily:

• Type of the fund (equity and debt and others)
• Type of Income from the fund (dividends or capital gain)
• Duration of the investment

In the budget of 2020, the finance minister made some key amendments concerning taxation on dividends. With these implementations, dividends are now taxable in the hands of the investors. It is added to the tax-payers income in a financial year, and the total income is taxed as per the appropriate tax slab.

Capital gains are taxed depending on the type of fund and the holding period.

• Type of Fund There are primarily two types of fund from the taxation point of view - equity funds and debt funds. If the equity allocation of a fund is 65% or more, it is known as an equity fund, and if it is less than that, it is known as a debt fund.
• Holding Period Now, based on investment duration, the capital gain is taxed under a short-term capital gains tax (STCG) or a long term capital gains tax (LTCG). This varies for different types of funds.

The table below summarises the tax rates:

Tax calculated on SIP works a little differently than how mutual funds are taxed . Here, each investment is treated as a new individual investment, and the capital gains are taxed according to the holding period of each SIPs.Laxmi invests in an equity fund SIP every month. After 14 months, she decides to redeem her entire investment. Thus, the first 3 SIPs complete the 1-year tenure and the rest are redeemed before 1-year. In such a case, the capital appreciation on the first 3 SIPs will be taxed at 10% if the returns are more than 1 lac in a financial year. The capital gains on the rest 11 payments will be treated as STCG as they have not yet completed their 1-year tenure. For example,

For NRIs, while the holding period, which defines the type of tax, remains the same as for resident Indians, there is a slight change in tax rate depending on the fund type.

Moreover, if India has signed a DTAA (Double Tax Avoidance Agreement) with the country of your residence, you will only have to pay tax for your mutual funds' earnings in India, and not again in the country of your residence.

Tax can erode your earnings or capital gains significantly. Make sure you calculate the tax implications before you redeem your mutual funds and take a decision accordingly.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.