Understanding Mutual Fund Tax Implications on Redemptions

Are you planning to explore the mutual fund space for long-term wealth creation? Have you considered the tax implications? If not, you are making a rookie mistake as mutual fund withdrawals attract tax. The concept of mutual fund taxation is a tad complex as it hinges on various factors like the type of fund, duration of investment, and the income tax slab. In this post, we'll shed some light on how mutual funds income is calculated and taxed.

Capital gain is referred to as profit earned while redeeming/selling mutual fund units. It occurs when an investor sells a scheme at a higher Net Asset Value (NAV) than it's purchased NAV. Simply put, capital gains result due to the price appreciation of the units in the mutual funds. They are calculated by deducting the cost of the unit from the selling price.

Capital gains are classified into two categories: short-term capital gains tax (STCG) and long term capital gains tax (LTCG) . The tax implication depends on the type of mutual fund schemes and the investment horizon.

• LTCG on Equity Funds: Equity-oriented funds redeemed after one year or more are subject to LTCG tax at 10% (+4% cess).It must be noted that gains remain tax-free up to ₹1 lakhfor all investments made after 31st January 2018. In other words, LTCG tax on equity funds is imposed only if the cumulative capital gain in a financial year is over ₹1 lakh.
• STCG on Equity Funds: If the equity holding is sold within a year of purchase, then STCG is levied on the earnings at the rate of 15% (+ 4% cess).

• LTCG on Debt funds: if debt instruments are sold after three years, LTCG is applicable at the rate of 20% with indexation.
• STCG on Debt Funds: The profits earned within three years are considered short-term gains. They are added to the investor’s income and taxed as per the slab rate.

• Capital Gains on Equity Funds
• Capital Gains on Debt Funds

For mutual fund investments made through systematic investment plans (SIP), the holding period for each SIP is calculated separately.And yes, expenses sustained during transactions can be claimed for deduction when filing capital gains for mutual fund tax .

A loss arising from the sale of mutual funds should also be disclosed in the ITR. It can be of two types (short-term and long-term capital loss). While long-term capital loss can be adjusted only against LTCG, the short-term capital loss can be off-set against short-term as well as long-term capital gains.If capital losses cannot be adjusted in the same year, they can be carried forward and set off against capital gains in another year. This can be accomplished in eight consecutive years.

If you have redeemed any of your mutual funds in the assessment year, the next step is to declare the capital gains/losses incurred in your ITR form. Thanks to E-Filing, the process is simple.There are different ITR forms available, and individuals with income from salary and capital gains need to file ITR-2. The taxpayer needs to be armed with the following information about mutual fund redemptions:

1. ISIN Code
2. Name of the Share/Unit
3. No. of Shares/Units
4. Sale-price per Share/Unit
5. Cost of acquisition per Share/Unit
6. Fair Market Value per share/unit as of 31st January 2018
7. Cost of improvement without indexation
8. Expenditure incurred in connection with the transfer

• The above details need to be inserted in 'Section 112A schedule' as directed.
• Alternately the capital gains for each transaction can be calculated and the aggregate amount entered directly in the 'CG' schedule (Part B- 4) of the ITR-2 form.

These are the basics of determining mutual fund tax . If you are still sceptical and unsure of how to calculate and disclose capital gains/losses, seek advice from a financial expert to help file your ITR.

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.