Mutual fund taxation for FY 2019-20

Mutual funds are a popular choice for investment today. However, earnings from it are eligible for taxation. This article will give you an overview on mutual fund taxation for FY 2019-20.


Time and again, mutual funds have proven to be the long-term investor’s delight in most cases. However, it is necessary that you are aware of the income tax implications on the earnings from mutual funds to keep enjoying the fruits of your investment.

Taxation on mutual fund income depends on various factors like the type of fund you hold, holding period, your residential status and the method in which you earn the returns.Let’s understand how each of these factors can affect your mutual fund tax status.

Type of Funds

Mutual fund investments are broadly classified into two types –

1. Equity Mutual Funds: Equity or equity-oriented mutual funds hold minimum 65% of their fund corpus in equity or equity-related assets. For example:  ELSS, large-cap, mid-cap, multicap, smallcap funds and equity-oriented balanced funds fall under this category.

Do note that besides funds that come under SEBI’s definition of ‘equity funds’, there are some other types of hybrid funds where average gross equity allocation is over 65%. For example, aggressive hybrid funds, arbitrage funds, equity savings funds etc. will also have the same tax implications as equity funds.

2. Non-equity Funds: Funds that allocate less than 65% of their corpus into equity or equity-related assets come under the definition of non-equity funds. These also include debt funds.

It is important to know that gold funds, funds of fund and international funds come under SEBI’s definition of non-equity funds, irrespective of their equity allocations.

In case you are uncertain about the category your fund falls under or the tax implications on the mutual funds you hold, then it is recommended that you consult a financial advisor.

Holding Period

One of the utmost important factors to know the tax implication of your fund is the holding period. This is the time period for which you hold your mutual fund investment before selling it. Based on this, the Income Tax Department has defined long-term capital gains tax (LTCG) and short-term capital gains tax (STCG). You are taxed only on the gains you make on selling / redeeming your mutual fund investments.

The holding periods are defined depending on the type of fund. In case of an equity fund, if the holding period is more than a year, then it is termed as long-term mutual fund investment; if it is lesser than a year, then it is short-term. On the other hand for non-equity funds, a holding period of over 3 years will be defined as long-term and any time lesser than that will be short-term. 

Therefore, the type of fund and the holding periods play major roles in deciding your mutual fund investments’ tax liabilities.

Residential Status

Taxation laws are different for residents and non-residents of India (NRIs). Similarly, there is slight difference in tax implications on mutual fund investments.

Mutual Fund Taxation for FY 2019-20

Capital gains tax for returns earned on mutual fund investments for resident Indians will be as below –

Types of Mutual Fund LTCG Tax STCG Tax
Equity-oriented
funds
10% on gains made above Rs. 1 lakh 15%
Non-equity
funds
20% (with indexation)Based on individual’s tax slab

Capital gains tax for returns earned on mutual fund investments for non-resident Indians (NRIs) will be as below –

Types of
Mutual Fund
LTCG Tax STCG Tax
Equity-oriented
funds
10% on gains made above
Rs. 1 lakh
15%
Non-equity
funds
Listed 20% (with indexation)
Unlisted 10% (without
indexation)
Based on individual’s tax slab

Please Note-

  • A surcharge at the rate of 15%, is applicable in case of income of Individual/HUF unit holders exceeds Rs. 1 crore
  • A surcharge at the rate of 10% is levied if the individual/ HUF unitholders income exceeds Rs.50 lakh, but is below Rs.1 crore
  •  Health and Education Cess at the rate of 4% continues to apply on the aggregate of tax and surcharge
  • Dividend Distribution Tax
    • Mutual funds generate returns in two ways – Dividends and capital gain. The taxation method on capital gain is discussed above.
    • The dividend option, which some mutual funds investors opt for to receive profits at regular intervals of time while still holding the investment also attracts tax liability. Such income from equity funds is taxable under Dividend Distribution Tax (DDT) at 10%.  In case of a non-equity fund, DDT is charged at 25%.
    • However, the DDT is to be paid by the mutual fund before passing on the dividends to the investors. Therefore, as investors, you will get dividend amounts from which DDT has already been deducted.

Therefore –

Tax Equity Funds Non-equity funds
Dividend Distribution Tax 10% + 12% Surcharge + 4% cess 25% + 12% surcharge + 4% cess

It is therefore necessary to understand the tax implications on your mutual fund investments before choosing the ‘growth’ or ‘dividend’ option to make an informed decision.

Conclusion

It is always important to be aware of the taxation your investments may be eligible for to plan them in a better manner.  Also, mutual fund investments can be best enjoyed when you are free of the taxation worries.


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