How your mutual fund investment is taxed - Tax implications on MF investment incomes (2024)

Dec 09, 2019, 03:11:47 PM IST

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Tax implications on MF investment incomes

Dividend income

As per the Budget 2020 proposal, dividends would be added to income and taxed according to the income tax slab applicable to the investor from April, in the investor's or unit holder's hands. As per the existing rules, mutual funds were supposed to pay dividend distribution tax or DDT on the dividends declared by them.

Currently equity-oriented schemes (schemes with >=65% allocation to equities) are subject to 10%DDT along with 12% surcharge and 4% cess, making effective DDT to be 11.648% for all types of investors whether resident Indians, NRIs or domestic companies.

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Capital gain- equity funds

Profit made on sale of mutual fund investments is termed capital gain. For equity oriented schemes, if the investment is held for 12 months or less, it is termed as short term capital gain and taxed at 15%. If the investment is held for more than 12 months, it is termed as long term capital gain (LTCG) and taxed at 20%, in case the total LTCG for the year is above Rs 1 lakh.

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Capital gain– non-equity

For non-equity schemes, if the investment is held for 36 months or less, it is termed as short term capital gain and taxed at 20%. If the investment is held for more than 36 months, it is termed as LTCG and taxed at the highest tax slab applicable to the investor.

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Indexation benefit

Indexation refers to recalculating the purchase price, after adjusting for inflation index, as published by the Income-Tax authorities. Since the purchase price is adjusted for inflation, the capital gain gets reduced. In case of LTCG for non-equity funds, investors can avail the indexation benefit.

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Points to note

Investments up to Rs 1.5 lakh in notified equity linked savings schemes are eligible for deduction u/s 80C. However, these are subject to a 3-year lock-in.
In case of SIP, each instalment of SIP is taken as a separate investment and holding period is reckoned from the date of that investment.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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