Mutual Fund Taxation
Mutual Fund is one option which has the potential to offer capital gains.
The period over which investors invested in a mutual fund scheme is known as the holding period. The holding period plays a significant role in determining the tax implications of an investment.
Types of Holding Periods
Long-Term Holding Period
In the case of equitym Perdida de cabello mutual funds, a holding period of 12 months or more is considered as long term. The investment is however considered long term if the holding period is more than 36 months, in the case of debt funds.
Short-Term Holding Period
Equity investments, if held for a period of fewer than 12 months then, they all are considered short term. Debt funds held for less than 36 months are considered a short term.
The following table shows the categorization of the holding period of mutual funds:
| Funds | Short-term | Long-term |
| Equity funds | Less than 12 months | 12 months and more |
| Balanced funds (equity-oriented) | Less than 12 months | 12 months and more |
| Balanced funds (debt-oriented) | Less than 36 months | 36 months and more |
| Debt funds | Less than 36 months | 36 months and more |
Hybrid equity-oriented funds equity exposure of more than 65% is regarded as equity funds for taxation. If the equity exposure in a hybrid fund is less than 65% or is equally exposed to equity and debt instruments, for example 50% equity and 50% debt, then it is considered as a debt fund for taxation.
Taxation on Mutual Funds
Equity Funds
Tax-saver and regular equity funds are considered the same for taxation. LTCG tax is applicable on equity funds @ of 10% if the capital gains exceed Rs 1 lakh a year, and there is no benefit of indexation. However, when it comes to the lock-in-period, ELSS funds differ from the regular funds. While most regular equity funds do not have a lock-in period, ELSS funds come with a lock-in period of three years. The redemption of ELSS mutual funds can be made only at the end of the lock-in period.
The limit of 1 lakh is cumulative of capital gains on all equity instruments such as stocks and equity mutual funds.
Debt Funds
Long-term capital gains on debt funds are taxable @ of 20% after indexation. Indexation is a process of factoring inflation from the time of purchase to sale of units.
Indexation allows inflating the purchase price of debt funds to bring down the quantum of capital gains.
Balanced Funds
Balanced funds are taxable depends on their equity exposure. Hybrid equity-oriented funds are taxed as any other equity fund while hybrid debt-oriented funds are taxed as any other debt fund.
SIPs
Systematic investment plans (SIP) are a method of investing in mutual funds. They are designed such that investors can invest a small sum periodically. Investors are given the complete liberty to choose the frequency of their investment.
The taxation of SIP investment is done on a pro-rata basis. Each SIP, treated as a new investment, attracts taxes on its gains separately.
For example, you start a SIP of Rs 1,000 a month in an equity fund for 12 months. Each SIP is considered to be a new investment. Hence, after 12 months, if you decide to redeem your entire accumulated corpus (investments plus gains), all your gains will not be tax-free. Only the gains earned on the first SIP would be tax-free because only that investment would have completed one year. The rest of the gains would be subject to short-term capital gains tax.
Securities Transaction Tax (STT)
There is another type of tax called the Securities Transaction Tax (STT). An STT of 0.001% is levied by the government when you decide to sell your units of an equity fund or a hybrid equity-oriented fund. There is no STT on the sale of debt fund units.
