Why Mutual Funds: Mutual funds are managed by professional money managers to help investors to generate better inflation-adjusted returns with transparency and convenience. Another important highlight of mutual funds is “Diversification” offers investors an opportunity to diversify their investment in various assets classes like equity, bonds and other securities.
Mutual fund taxation
There are various taxes related to mutual funds, it is vital for investors to know mutual fund taxation. Even though – dividends from mutual funds are totally exempt from income tax, but there are other taxes involved in mutual funds.
1. Equity mutual funds: These mutual funds invest our money in companies which are listed in stock exchange. There are different kind of equity mutual funds in India, mainly – Large-cap funds, mid-cap funds, small-cap funds, multi-cap funds and thematic fund/sector fund.
Taxation of Equity mutual funds: If we hold these funds for more than 1 year, then it is fully tax free and will be considered as long-term capital gain. If investors hold these funds for less than 1 year – then your short-term capital gain will be taxed at 15%.
2. Equity oriented balanced funds: Equity balanced funds or hybrid funds invest at least 65%-75% in equity and remaining in fixed income securities/debt instruments as per their offer document. This kind of investment is ideal for someone who looks benefit from the stock market as well as fixed income options that offer stability to the investment.
Taxation of equity oriented balanced mutual funds: If we hold these funds for more than 1 year, then it is fully tax free. If investors hold these funds for less than 1 year – then your short-term capital gain will be taxed at 15%. Dividends are fully tax free.
3. Debt-oriented balanced mutual funds: Debt oriented balanced funds invest at least 75 per cent in debt and the rest in equity instrument.
Taxation of debt oriented balanced mutual funds: Long-term capital gains (after holding for 3 years) taxed at 20% with indexation benefit. Short-term gains are added to the income of the investor and taxed as per the applicable tax slab at marginal rates.
4. Debt funds mutual funds: These funds mainly invest in debt and fixed income securities such as Corporate Bonds, Money Market instruments, Government Securities and other debt securities. There are different kinds of debt mutual funds – Liquid Funds / Money Market Funds, Ultra Short Term Funds, Floating Rate Funds, Short Term & Medium Term Income Funds, Income Funds, Gilt Funds and Corporate Bond Funds.
Taxation of debt mutual funds: Long-term capital gain after holding for 3 years is taxed at 20% with indexation benefit. Dividends are tax-free but scheme pays a very high dividend distribution tax of 28.32%. Short-term gains are added to the investor income and taxed as per the applicable tax slab.
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