How to Calculate Tax on Mutual Funds?

How to Calculate Tax on Mutual Funds?

How to Calculate Tax on Mutual Funds

One of the finest investing alternatives is a mutual fund. Investment in mutual funds might help you reach any financial objective you have.

In comparison to all other investing alternatives, mutual funds are projected to provide better returns. It’s possible you’re not conscious that mutual fund profits are taxed.

This implies you’ll have to pay tax when you liquidate mutual funds. Mutual fund taxes are calculated depending on mutual fund categories and holding periods.

If you wish to retrieve your mutual fund, you should be aware of the income tax implications on capital gains.

Here’s all you need to know about mutual fund taxes.

Returns on Mutual Funds – Dividends and Capital Gains
Dividends and capital gains are the two forms of mutual fund earnings.

It is well acknowledged that these returns vary depending on the mutual fund kind.

Dividends are a type of reward offered by mutual funds. Dividends are distributed from the company’s financial performance, provided any exist.

When businesses have excess cash, they may choose to distribute it to shareholders in the style of dividends. Dividends are paid to investors in proportion to the number of mutual fund units they own.

If you engage in a growth mutual fund, you would not be paid a dividend, but you’ll be given a capital gain if you transfer the mutual fund unit at a higher cost and make a huge profit.

Mutual Fund Tax on Dividend
Dividends paid by any mutual fund scheme are taxable in a conventional way, according to the modifications announced in the Union Budget 2020.

Dividends earned by investors are included in their taxable income and taxed at the rates applicable to their individual income tax slabs.

Dividends were formerly tax-free in the hands of investors since corporations paid dividend distribution tax (DDT) before distributing earnings with shareholders in the guise of dividends.

Dividends of up to Rs 10 lakh per year were tax-free in the possession of shareholders during this period.
Mutual Fund Tax on Capital Gain
The capital gain tax on mutual funds is determined by the mutual fund’s kind and holding duration.

The term refers to the period between when mutual funds are purchased and when they are sold.

A capital gain is the amount of money generated as a profit. This profit is separated into two categories based on the time frame: short-term capital gain and long-term capital gain.

The capital gain classification information type and duration are shown below.

Type of Fund Short term capital gain Long term capital gain
Equity Funds Less than 12 months More than 12 months
Debt Funds Less than 36 months More than 36 months
Hybrid Equity Funds Less than 12 months More than 12 months

Debt funds are mutual funds that have more than % of their assets invested in debt.
Short-term capital gains arise from attempting to redeem debt fund units during a three-year holding period.

These gains are charged at a rate established by your income tax bracket and are reported in your taxable earnings.

Long-term capital gains are earned when you liquidate debt fund shares after a three-year holding period.

These earnings are taxed at a flat rate of 20% after indexation.You will additionally be levied the applicable cess and tax premium.

Tax on Equity Funds
Mutual funds with a portfolio equity exposure of more than 65 per cent are called equity funds. As previously stated, short-term capital gains are realised when you exchange your equity fund units during a one-year time frame.

Regardless of your income tax level, these profits are charged at a flat rate of 15%.
The long-term capital gain tax applies if you keep an equity mutual fund for more than one year.

In this scenario, profits up to 1 lakh per year are exempted. If your capital gain exceeds 1 lakh per year, you must pay a flat 10% tax rate.

Tax on Hybrid Mutual Funds

A hybrid mutual fund combines equities and debt funds. If the scheme’s equity exposure exceeds 65 per cent, it is taxable as an equity mutual fund.

If the debt component of a mutual fund is larger, it’ll be taxed like a debt mutual fund.
This implies that you must be aware of the scheme’s vulnerability before investing your funds. This info will come in handy when it comes time to redeem your money.

Tax on SIP
SIP is another method of investing money. Usually, as an investor, you invest your money via SIP.

Another way to invest is through a systematic investment plan (SIP). Typically, as an investor, you deposit your money through a systematic investment plan (SIP).
With each SIP instalment, you buy a specified amount of mutual fund units.

These units are redeemed in the order in which they were received. Assume you make a one-year SIP investment in an equities fund and choose to retrieve your whole investment after 13 months.

The units acquired initially through the SIP are kept for a long time (over a year) in this example, and you earn long-term capital gains on them.
You might not have to pay tax if your long-term capital gains have been less than Rs 1 lakh.

You should strive to make the most out of it by picking the correct Mutual Funds now that you understand the Taxes payable on different types of Mutual Funds.

Nevertheless, before reaching any choice, an impartial tax consultant should be consulted.

Earn higher returns and save more money!

CA Mukesh Gupta
CA Mukesh Gupta
Mukesh Gupta is the founder and director of Wealthcare. He is Fellow chartered accountant, Certified Financial Planner and Certified Public Financial advisor. He is in financial services industry since 1994. He conducts free money management sessions for corporates and associations on topics related to Personal finance. His previous engagement was with Birla Sunlife group. He regularly writes on topics related to Personal finance and occasionally appear on electronic media.

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