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Factors to keep in mind before choosing Mutual Funds
An investor education & awareness initiative.
Amended as on Apr 1, 2023: Please note that as per amendments in Finance Bill 2023, from April 1, 2023, profits made on investments in debt mutual funds are now taxed as short-term capital gains if these funds invest <=35% in equities. This means, debt mutual funds are now taxed as per the income tax rates as per an individual’s income.
Also note that with effect from Apr 1, 2020, Dividend Distribution Tax (DDT) was abolished, and mutual fund dividends were made taxable in the hands of investors. Dividend income is now considered as ‘income from other sources’ and investors need to pay tax on it as per their individual tax slabs.
This article is currently in the process of getting updated, as it was originally written at a time when tax rules were different. Please treat this note as the latest updated tax information in the meanwhile.
Think of teamwork every time you consider your portfolio and then think of the reason why a particular fund is there in your portfolio. If you cannot remember the reason why you bought a fund in the first place, or you cannot understand why you’re adding a new fund to your portfolio, it could be an indication of the need for you to rethink your decision.
If you invest in an equity-oriented mutual fund (i.e. one whose allocation to equity shares of domestic companies listed on stock exchange is at least 65%) and hold your investment for more than 12 months, your long-term capital gains exceeding Rs 1 lakh per financial year will be taxable at 10% (without indexation) as per the Finance Bill, 2018 w.e.f 1st April, 2018. However, if you hold the same for less than 12 months, it attracts tax at 15%
Note: Here, 12 months is the cut off time to be considered as ‘Long Term’.
ii. Non Equity Oriented Funds Non equity oriented funds are further divided into two categories on the basis of their allocation to equity shares of domestic companies a. Specified mutual funds - Specified Mutual Fund" means a Mutual Fund by whatever name called, where not more than thirty five per cent. of its total proceeds is invested in the equity shares of domestic companies. Finance Act 2023 has inserted Section 50AA in the Income Tax Act, 1961. As per the said section, with effect from 1 April 2023, gains/losses from units of Specified Mutual Fund would be deemed to be short term capital gain/loss irrespective of period of holding and would be taxed as per the slab rate applicable to investors. This is applicable for all such units which are acquired on or after Apr 1, 2023. Any investment in specified mutual funds prior to April 01,2023 would continue be taxed as per point b given below. b. Non Equity oriented funds Other than specified mutual funds The said category includes such mutual funds whose allocation to equity shares of domestic companies is more than 35% but less than 65%. If you held your investments in such non-equity-oriented funds for more than 36 months, your capital gains would be taxed at 20% with the benefit of indexation (which reduces the capital gains tax payable), or at 10% without indexation if the units are unlisted which ever is more beneficial to investor . Here, 36 months was considered as the cut-off time for such investments to be considered ‘Long-Term’. However, holding such investments for less than 36 months would attract tax at a rate based on the tax slab your total income fell under.
Key Takeaways
Disclaimer: All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/redress complaints, visit dspim.com/IEID. This is an investor education & awareness initiative by DSP Mutual Fund.
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Mutual fund investments are subject to market risks, read all scheme related documents carefully. © DSPAM 2024.
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