How Are Mutual Fund Investments Taxed?

It is crucial to be familiar with the tax treatment of mutual funds if you are interested in investing.

Capital gain or profits from mutual fund investments are subjected to income tax because they are income from your investments. The taxation of mutual funds is very simple and can be applied to your investments based upon two factors. The first is the type and tenure of the mutual fund scheme that you have invested in.

To calculate taxes on mutual fund gains, mutual investment can be divided into two types depending on which assets they invest in. Mutual funds which invest at least 65% of their assets are called Equity Oriented Schemes. Schemes that allocate less than 65% to equities, are called Non-Equity Oriented Schemes.

Mutual funds tax also depends upon the holding period, i.e. how long you have invested in the fund prior to selling it off. The definition of holding time is different for equity-oriented and non-equity schemes. In the case of equity-oriented schemes, a holding period of at least one year is considered long-term. A holding period shorter than one year is considered short-term. Non-equity-oriented plans, however, a holding period of three years or more is considered long-term. Otherwise, it is considered short-term.

Capital gain in mutual funds is calculated using the Net Asset Value or NAV. This is the difference between purchase date NAV or sale date NAV. The type of investment and the holding period will determine the amount of tax that must be paid at redemption.

If you sell your equity-oriented scheme (EOS), a 10% Long-Term Capital Gains Tax is applied. This means that schemes with >=65% equity allocation will be subject to 10% LTCG tax. Equity funds are subject to LTCG tax at 10% if their cumulative capital gain exceeds INR 15,000 in a given financial year. When setting financial goals, keep in mind that your gains are tax-free for up to INR 15,000 Your investments that are held for less than one year in EOS will be subject to a 15% capital gains tax if they are sold within one year of their purchase.

Non-equity Schemes (NES), i.e. schemes with 65% allocations to equities, attract LTCG Tax of 20% after indexation (adjustment in inflation). To account for inflation-related increases in NAV, the purchase price is adjusted upwards. Capital gains are also taken into consideration. If you are able to sell your investments in less than 3 years, short-term capital gains tax will apply. The rate would be the same for the highest income tax bracket applicable to the investor.