How Mutual Funds are taxed in India latest as per current year FY 2019-20
When you are planning for your long term goals, no doubt Mutual funds will have the potential to give you better returns than any other equivalent product in India. Earlier Equity Mutual funds returns are completely tax-free if you redeem them after 1 year of investment, however, now such tax-free returns are not available anymore. in this new tax regime, If you have clear knowledge on how all mutual fund schemes are taxed in India, you will be able to take maximum benefit and plan your mutual fund redemptions accordingly to get superior returns. How Mutual Funds are taxed in India latest for FY 2019-20? What are the proven ways to plan your tax on mutual fund returns? How to reduce the tax on mutual fund schemes? Read more to get more clarity on all possible taxation rules for Mutual fund returns in India.
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Key Note: Mutual fund returns are taxable in India only when you redeem/withdraw money from them or when you receive dividends from them.
What are mutual funds? Please skip this section if you know about mutual funds already!
Mutual funds are schemes for investment through which investor’s funds will be pooled together to invest in Equity stocks (Companies), Govt. bonds, Corporate Bonds, etc by a professional Fund Manager.
We can invest in Mutual funds by 2 ways
Lump sum: Money can be invested in one go.
SIP: Systematic Investment Plan is an automatic arrangement with the pre-determined sum of money will be invested at a regular period, like monthly, weekly etc.
What factors will decide taxation of Mutual Funds for FY 2019 -20?
Mutual funds scheme redemptions will be taxed at different tax rates for each fund category and based on the period of investment in that particular fund.
Tax on mutual fund returns is determined by below key factors.
- Type of Mutual fund schemes like Equity type or Debt type etc.
- Investment Duration in Mutual fund plans
- Individual Residential tax status ( Resident Indian or NRI)
1)What are that Types of Mutual Fund Investments
Type of Mutual fund is a major factor in arriving applicable tax rate when you redeem mutual fund, broadly there are two types of Mutual fund types or categories of Mutual funds in India. Equity Mutual Funds and Non-Equity ( Debt) Mutual Funds
Equity Mutual funds
These funds invest a major portion of funds in Share market, stocks, Equity related investments. These funds invest a minimum of 65% of the money in Equity markets or stocks. These include following mutual funds.
- Large Cap Mutual funds.
- Midcap Mutual Funds
- Small-cap Mutual Funds
- Multi-cap Mutual Funds
- Balanced Mutual funds
- Tax saving ELSS funds etc.
Debt Mutual Funds or Non-Equity Mutual funds
These funds invest the majority of money in Govt. bonds, Fixed duration Bonds issued by companies, corporate Bonds, Infrastructure bonds etc. These funds invest less than 65% of the money in Equity markets or stocks. These include following mutual funds.
- Debt Mutual funds
- Liquid Mutual Funds
- Gold Mutual Funds
- Infrastructure Bond Mutual Funds etc.
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2)Investment Duration in Mutual fund plans
Mutual fund schemes in India are taxed only when you sell/redeem/Withdraw money from them, When you sell your mutual fund units and you make a profit or loss, then you will have either capital gain or capital loss.
If you redeem/sell your mutual fund units within a short duration and make profits then Short term capital gain tax is applicable and sam is with long duration then Long term capital Gain tax will be applicable depending on the period and type of mutual fund you hold.
Duration of Short term or long term is defined for Equity and Debt mutual funds separately for tax purposes. Same will be explained below with examples.
3)Individual Residential tax status ( Resident Indian or NRI)
Above mentioned capital gain tax rates are decided by your residential status as per Income tax rules, Mutual fund returns tax will depend on whether you are resident Indian or Non-Resident Indian. While most of the funds have same tax rates for both Resident and Non-Resident Indians, Mutual Fund returns for NRIs are subject to TDS, means whenever an NRI Sell Mutual fund units, Mutual Fund company will deduct tax at source from your returns and pays to Income Tax Department of India.
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What is Short term Capital Gains( STCG) in Mutual Funds in India?
When you hold an Equity Mutual fund plan ( as listed above like large cap, mid cap etc) for a period of less than 1 year and if you make a profit from those mutual fund units, then your profit is said to be short term capital gain and if you hold any Debt mutual fund for a period of less than 3 years and made a profit when you sell them, you are said to be having short term capital gains from your investments.
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What is Long term Capital Gains(LTCG) in Mutual Funds in India?
When you hold an Equity Mutual fund plan ( as listed above like large cap, mid cap etc) for a period of more than 1 year and if you make a profit from those mutual fund units, then your profit is said to be Long term capital gain(LTCG) and if you hold any Debt mutual fund for a period of more than 3 years and made a profit when you sell them, you are said to be having Long term capital gains from your investments.
How Equity Mutual Funds are taxed in India latest for FY 2019-20.
Equity Mutual funds like Large cap, Midcap, ELSS, Balanced mutual funds, etc will have tax implications as below.
1)Returns from equity funds for Short term Capital Gains are taxed at the rate of 15% on the gains made within 1 year.
2)Returns from Long term capital gains are taxed at 10% only if returns exceed Rs.1,00,000/- (Rs. 1 Lakh) in one Financial Year. and LTCG is NIL if the return is less than 1 Lakh ( On gains of your redeemed /Sold/Withdrawn money only)
- Example: if your total Long term capital gains by selling your mutual fund units are Rs.1,20,000/-( 1.2Lakhs) in one financial year ( Selling year), then your Long term tax liability will be 10% of Rs. 20,000/-, that is Rs. 2,000/- . After taking an exemption of 1Lakh as per income tax rules.
How Debt Mutual Funds are taxed in India latest for FY 2019-20
- Income from Debt Mutual fund Short term capital gains ( Sold within 3 years of investment) will be considered as your earnings in that year and will be clubbed with your earnings. These Short term Capital Gains are taxed as per your income tax slab rates applicable in that financial year.
- Long term capital gains( Sold after 3 years of Investment ) from Debt Mutual funds are taxed at 20% after considering Indexation benefits.
How SIP or Systematic Investment Plans Gains are taxed in India for FY 2019 – 20
SIP is just one method of investing in Mutual funds, Each SIP investment must be considered as a separate investment. Tax implications will remain the same, we need to only calculate investment date and Redemption date for arriving whether it is Short term capital Gain or Long term Capital Gain.
Example: If you are having a SIP of Rs. 1000/- every month in an Equity Mutual fund, for 12 months. if you wish to sell all your mutual fund units in 13th Month, then only Gains of 1st SIP investment will be considered as Long term Gains, as this has crossed 1 year of the investment period, all other SIP investments from 2nd month to 12th month will be considered as short term Capital Gains.
Summary of Mutual Funds Taxation in India latest for FY 2019-20
How Dividends issued by Mutual funds will be taxed in India? Know about Dividend Distribution tax.
Dividend Distribution tax will be paid by Mutual Fund companies before they give dividends to you. Means they deduct this tax and pay the rest of the amount to you.
- For Debt Mutual Funds, Dividend Distribution tax is around 25% of Dividends + Surcharges.
- For Equity Mutual funds, Dividend Distribution tax is charged at the rate of 10% + Surcharges. This DDT on Equity funds was introduced in Budget 2018.
- Mutual Fund companies will pay Dividend Distribution tax before they give Dividends to you. The investor need not pay any tax extra. These dividend amounts are tax-free for investors.
How Mutual funds are taxed for Non-Resident Indians (NRIs) in India?
As explained in the above post, NRIs can avoid double taxation.
All Tax rates for NRIs are the same as that of Resident Indians. The major difference for the tax of NRIs & Residents in Mutual funds is that Tax will be deducted at source by Mutual funds for NRIs.
It is always better to have an understanding of tax implication before redeeming or withdrawing your Mutual fund units. If it is wise to wait for a few more days to save tax, you may do so.