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.
Every mutual fund transaction has a tax implication. This depends on the nature of the asset and the period of holding. Unfortunately, prior to investing in mutual funds, specifically debt or non-equity mutual funds, many ignore the implications of capital gains tax on their investment.
Capital gains tax on mutual fund holdings is established upon whether you hold equity oriented funds or non-equity oriented funds.
Equity oriented funds are defined as those in which 65% of the investible corpus in invested in Indian equities.
Non-equity funds are those which invest less than 65% in Indian equities – these include debt funds (such as income funds, liquid funds, gilt funds, floating rate funds, Fixed Maturity Plans (FMPs), Monthly income Plans, (MIPs), Gold ETFs and so on. Notably, even fund-of-funds which may invest indirectly in Indian equity through other mutual funds are not considered as equity funds.
|Equity Oriented Schemes
LTCG (units held for more than 12 months) , STCG (units held for 12 months or less)
|Long Term Capital Gains||10%+ Surcharge as applicable + 3% Cess||10%+ Surcharge as applicable + 3% Cess||10%+ Surcharge as applicable + 3% Cess|
|Short Term Capital Gains||15%+ Surcharge as applicable + 3% Cess||15%+ Surcharge as applicable + 3% Cess||15%+ Surcharge as applicable + 3% Cess|
|Non-equity Oriented Schemes
LTCG (units held for more than 36 months) , STCG (units held for 36 months or less)
|Long Term Capital Gains||20% with indexation + Surcharge as applicable + 3% Cess||20% with indexation + Surcharge as applicable + 3% Cess||20% with indexation + Surcharge as applicable + 3% Cess|
|Short Term Capital Gains||30%^ + Surcharge as applicable + 3% Cess||30% + Surcharge as applicable + 3% Cess
25%^^^ +Surcharge as applicable + 3% Cess
|30%^ + Surcharge as applicable + 3% Cess|
^ - Assuming the investor falls into highest tax bracket.
^^^-If total turnover or Gross receipts during the financial year 2015-16 does not exceed Rs. 50 crores.
As can be seen in the table above, for equity oriented funds, while the capital gains tax implication for long term capital gains (LTCG) are 10%, Short Term Capital Gains (STCG) are taxed at 15%.
For non-equity oriented funds, long-term capital gains are taxed at 20% with indexation.
Indexation lets an individual adjust the purchase price of the mutual fund units by taking into account inflation, thus enabling them to reduce your tax outgo.
Short-term capital gains for non-equity oriented funds are added to the total income and taxed as per one’s tax slab, which means that if the 30% tax bracket applies to you, short-term capital gains arising from the sale of your mutual fund units will be taxed at 30%.
This means that the tax is calculated on mutual fund units on a First-in-First-out basis. So, if you have invested via a Systematic Investment Plan (SIP), do pay attention to check that the units you are redeeming met the requisite tax guidelines.
For example, if you started an SIP in an equity fund on October 5, 2016, and plan to redeem or switch all your investments on November 25, 2017. Only gains on units purchased on October 5, 2016 and November 5, 2016, will be tax-free. For units purchased in the subsequent months will attract short-term capital gains tax.
Therefore, it is important to consider the tax implications before investing or redeeming your money from mutual funds.
Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing