Mutual Fund Taxation

Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.

Imagine, you want to invest in equity and securities but you don’t have enough knowledge to plunge into the market, nor you can afford the fees of a professional. Here comes into the picture the popular investment instrument called Mutual Funds.

Mutual Fund is a type of investment tool where the Mutual Fund Company borrows money from investors in exchange for units and invests the same into a variety of equity and debt instruments. An investor can take advantage of the diverse portfolio built and managed by the Mutual Fund Companies.

There are different types of Mutual Funds depending on the securities forming part of the portfolio. From a taxation viewpoint majorly there are two types of Mutual Funds: Equity and Debt. Depending on the type of Mutual Fund, the taxation is determined.

Let’s discuss taxation on different types of Mutual Funds:

Equity-Based Mutual Funds

Equity-based Mutual funds are those where at least 65% of the funds are invested in equity shares of domestic companies.

Its taxation is similar to the taxation of Equity Shares. If the units are held for more than 12 months before selling, the gains will be considered as Long Term Capital Gains which will be taxed at 10%. Also, the exemption shall be available till ₹1 Lakh of the gains.

If the units are sold after holding for less than 12 months, Short Term Capital Gain will arise on the sale of the units which will be taxed at 15%.

Debt-Based Mutual Funds

Debt-based Mutual Funds are a scheme of funds where the investment is made in Corporate or Government Bonds and Debt securities.

Its taxation is similar to the taxation of Debts or debts based securities. If the units are sold after 36 months of holding the gains will be considered as Long Term Capital Gain and taxed at 20% along with the benefit of Indexation.

In a case where the units are sold before 36 months of holding, the gains will be considered as Short Term Capital Gain and will be taxed at the slab rates of the person.

Budget 2023 Update on Debt-Based Mutual Funds

The Finance Minister has brought an important change in the taxation of Debt-based Mutual Funds purchased after April 1, 2023. Debt Mutual Funds will no longer be considered as Long Term Capital Assets irrespective of the holding period and be taxed on slab rates without the benefit of Indexation.

Read more about Taxes on Debt Mutual Funds

Let’s take an example to understand taxes better.

Example: Mr. Ramakrishnan has invested and sold some mutual funds including equity-based and debt-based (all of which were purchased and sold before April 1, 2023) the details of which are:

He also has income from salary amounting to ₹8,00,000. Assuming he has opted for Old Regime, the tax liability will be as follows:

Dividends From Mutual Funds

The dividends received by unit-holders are also taxable. These dividends are taxable in the hands of the unit-holders as Income From Other Sources at the slab rates.

Let’s say you received dividend of ₹10,000 from the mutual funds you held. This dividend income will be taxable under the head Income from Other Sources.

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