Taxation on Mutual Funds – Equity

February 13, 2019

Taxation on Equity Mutual Funds

Equity mutual fund invests predominantly in shares of companies. As per SEBI Mutual Fund Regulations, an equity exposure of 65% or more is considered as equity mutual fund.

The holding period of equity mutual funds can be short term or long term.

Short Term for equity mutual fund is less than 12 months.

Long Term for equity mutual fund is more than 12 months.

Short Term Capital Gain (STCG):  The gains from equity mutual fund redeemed before 12 months are treated as short term capital gain and taxed at 15% + surcharge as applicable and cess.

Long Term Capital Gain (LTCG): Gains on equity mutual fund held for more than 12 months are treated as Long Term Capital Gain (LTCG). Long Term Capital Gains up to Rs.1 lakh are tax free.  LTCG in excess of Rs.1 lakh is taxed at 10% + surcharge as applicable and cess.

Tax on Dividends: Dividends from equity mutual funds are tax free in the hands of the investor. But dividends are paid after deducting a Dividend Distribution Tax (DDT) at 11.648%. (10% base rate + 12% surcharge + 4% Health and Education Cess).

Balanced Mutual Funds: Balanced mutual fund is a combination of equity and debt. In a balanced mutual fund if the equity exposure is more than 65%, is considered as equity oriented balanced fund. Taxation of equity oriented mutual fund is as same as equity mutual fund. Tax rates are explained above.

Equity Linked Savings Scheme (ELSS) is a tax saving mutual fund that qualify for a tax deduction under Sec 80C of the Income Tax Act 1961. Investments up to 1.5 lakhs in ELSS can be claimed for income tax deduction in a financial year. ELSS has a mandatory lock-in period of 3 years. Upon redemption after 3 years, the long term capital gain (LTCG) up to Rs.1 lakh is tax free. LTCG in excess of Rs.1 lakh is taxed at 10% + surcharge as applicable and cess.

*surcharge at 15% is applicable where income of individual/HUF exceeds Rs.1 crore and at 10% where income exceeds Rs.50 lakhs but does not exceed Rs.1 crore. No surcharge for income below Rs. 50 lakhs.

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