How mutual funds are taxed ?

Profits or gains arising from transfer of an asset, also known as a ‘capital asset’, such as mutual funds, property, gold, shares, and bonds are considered as capital gains and are taxed under the income head ‘capital gains’.

Such capital gains are of two types—short-term capital gains (STCG) and long-term capital gains (LTCG)—depending on the period of holding. Both these categories attract a different set of capital gains tax rates, depending on the asset type.

Here we will only discuss capital gains tax on mutual funds.

Tax Saving

Rahul, a mechanical engineer, met a Relationship manager at his bank branch last week. The RM kept pitching him with tax saving products. With so many financial products on the table, he was confused and couldn’t make an investment decision. He came back home confused between, what is tax planning and tax saving. He being a non-finance person could not understand the meaning of Section 80C.

For many like Rahul, we will explain today everything of Section 80C — the most loved section by the taxpayers under the Income Tax Act.

What is SIP ?

Simply put, a SIP refers to Systematic Investment Plan which is mode of investing in mutual funds in a systematic and regular manner. The method of investing is similar to your investment in a recurring deposit (RD) with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit, and hence your investments (in mutual funds) are subject to market risk.