Our Funds
Related Links
Tools View All
Knowledge Hub Explore
Investment Frameworks
Insights View All
Obsessed with helping you invest better. Trusted by 50L+ investors*
Services
If you are a first-time investor or new to DSP, Get started here
New to IFAXpress? Sign up
Uh-oh! No results found. We're on it!
Listening ...
This will help us to improve and provide you a better experience.
What are the tax implications of nvesting in 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.
Dividends: The mutual fund schemes may declare dividends based on the investment gains generated by it. If you have opted for the ‘dividend payout’ option, you would receive these dividends as and when they are declared. You may also opt for the ‘dividend reinvestment’ option in which case, the dividend due to you is reinvested in the same scheme to buy more units. If you opt for the ‘growth’ option, no dividends are declared; instead, the profits are retained in the scheme.
Capital gains: In addition to dividends, the NAV (Net Asset Value) of the mutual fund scheme rises over time to reflect the rise in the market prices of securities that the scheme has invested in. When you redeem your mutual fund units, if the NAV has increased as a result of this rise in prices of securities, you will earn profits {Profit = Number of units x (NAV at which you redeem your units minus NAV at which you purchase your units)}. This is called capital gains.
Now that we have understood how we earn from investing in mutual funds, let’s take a look at the broad categories of mutual funds as per income tax.
Equity-oriented and debt-oriented schemes
All mutual fund schemes are broadly classified as equity oriented or debt oriented based on their portfolio characteristics. If the scheme invests at least 65 per cent of its corpus in shares and related instruments (like futures, options etc), it is classified as an equity oriented scheme. Otherwise it is treated as a debt oriented scheme. The two are taxed differently. But in general, equity oriented schemes suffer lower tax than debt oriented schemes.
Another aspect that we need to consider is the duration of investing in a mutual fund. This impacts the amount of tax we pay on the profits earned.
Short term capital gains and long term capital gains
Capital gains are taxed according to their holding period and the type of scheme. In equity oriented schemes, if you have held your investment for at least one year, it is treated as Long Term Capital Gain (LTCG). If the holding period is lesser than a year, it is treated as Short Term Capital Gain (STCG). For debt oriented schemes, the minimum holding period to qualify as LTCG is 3 years; if you hold for less than 3 years, the gains are treated as STCG. Generally, LTCG suffers lower taxation than the corresponding STCG.
Dividend Distribution Tax (DDT)
While all dividends are tax-free in the hands of the investor, debt oriented schemes deduct a certain potion of the declared dividend and pay it to the government as DDT. So the net dividend that you realize would be the gross declared dividend minus the DDT deducted. As the scheme deducts DDT and pays it, you have no hassles in this regard.
Now that we have understood how mutual funds are taxed, let’s take a look at the tax rates.
Tax rates for Financial Year (FY) 2018-19
Though mutual fund taxation is reasonably stable over time, there can be minor variations from time to time. Following is a compilation of the tax rates for the Financial Year 2018-19.
TABLE COMES HERE
^Indexation is the process of adjusting your original investment cost for inflation as you are expected to pay tax only on the gain that you make over and above inflation. Indexation is done based on "Cost Inflation Index" numbers released by the income tax department for each financial year.
In conclusion, mutual funds offer numerous benefits to investors and tax efficiency is one among them. Your net returns depend not only on the return generated by your investment but also on the taxation that it suffers. The tax that you pay on any gains from your mutual fund investments is relatively lower than on other comparable investment options and hence has the potential to boost your investment returns. This is one of the key reasons why mutual fund products are highly popular investment instruments.
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.
Sign up for our newsletters.
Investor Relations Officer, DSP Asset Managers Private Limited, Natraj, Office Premises No.302,3rd Floor, M V Road Junction. W. E. Highway, Andheri(East), Mumbai-400069, Tel.:022-67178000.
Mutual fund investments are subject to market risks, read all scheme related documents carefully. © DSPAM 2024.
Any information regarding securities offerings, or references to securities offerings, that are contained on these pages do not constitute or form part of any offer of securities for sale or the solicitation of an offer to purchase securities in the United States or in any other jurisdiction where such offer may be restricted. The information in the coming pages is not intended for, and is not to be made available to, persons in the United States (being persons resident in the US, corporations, partnerships or other entities created or organized in or under the laws of the US or any person falling within the definition of the term "US Person" under the US Securities Act of 1933, as amended), wherever located. Any information regarding securities offerings, or references to securities offerings, that are contained on these pages do not constitute or form part of any offer of securities for sale or the solicitation of an offer to purchase securities in the United States or in any other jurisdiction where such offer may be restricted. In no event shall DSP Mutual Fund and / or its affiliates or any of their directors, officers and employees be liable for any special direct, indirect, special, incidental or consequential damages arising out of the use of information / opinion herein. The site, texts, images, designs, pictures, sounds, photographs, animation, and videos together with their layout and more generally all the items contained on this website are the sole property of DSP Asset Managers Pvt. Ltd. This site and all of the elements on this site are protected by Indian Law and by International copyright agreements concerning intellectual property. The content of this website must not be copied, modified, reproduced, distributed, transferred, edited or made accessible to third parties for any purposes whatsoever without obtaining prior permission from the owners of this website. *No. of unique investors who had invested with DSP at any time. ^Includes domestic AUM only, as on Dec 31, 2023 @ copyright DSPAM All rights reserved.
By submitting, I agree to receive a call from DSPAM for assistance.
We have received your query and will get back to you shortly.
Gain access to our latest articles on the world of investments.
Monthly update on all the information related to our funds.
Monthly insights on the economy and markets.
To help you our services, we would be grateful if yo could tell us why:
Mention reason
Describe reason
Update your preferences
The email address [email protected] has been removed from our mailing list. you will no longer hear from us.