Have You Sold Mutual Fund Units In The Last Financial Year? Here Are the Tax Implications   Jun 12, 2019


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Income tax filing deadline is around the corner. Apart from the income you earn from business/profession, one is required to pay tax on income from other sources, as well as on capital gains.

Capital gains are the gains you get from the rise in value of capital assets such as property, vehicle, jewellery, and market securities. The tax on such gains is only payable in the year in which the asset is sold.

Mutual fund investments are subjected to capital gain tax as investors earn profits/gains in the form of capital appreciation and dividend income. The tax implication on selling mutual fund units depends on the holding period (short-term or long-term) and the type of asset (equity or debt).

Here is how your mutual fund units will be taxed on redemption:

Equity Funds

If a fund invests at least 65% of its assets in equity and equity-related instruments it is classified as equity fund. For taxation purposes, a holding period of less than one year will be treated as short-term, whereas a holding period of more than one year will be considered as long-term.

Short-term capital gain (STCG) is taxed at the rate of 15%. Long-term capital gain (LTCG) is taxed at the rate of 10% if the gains are in excess of Rs 1 lakh. No tax is applicable on gains below Rs 1 lakh.

Debt Funds

In the case of debt funds, a holding period of less than three years is considered as short-term, whereas a holding period of more than three years is termed as long-term.

STCG on debt funds is taxable as per the applicable income tax slab to which the investor belongs.

The LTCG on debt funds is taxed at the rate of 20% with indexation benefits. The indexation benefit allows you to adjust the purchase price of debt funds for inflation. This helps bring down the tax on capital gains. The cost of inflation index (CII) is used to arrive at the cost of acquisition.

Indexed cost of acquisition = (Purchase price x CII of the year of sale) / (CII of the year of purchase)

If you are holding balanced funds, the tax will be determined as per the assets the fund is holding. If the fund has invested 65% or more of its total assets in equity instruments, it will be taxed in the same way as equity funds. Else, it will be taxed as debt fund.

Apart from these, mutual funds are also subject to dividend distribution tax (DDT) when the fund declares dividend and it is paid by the fund i.e. DDT is tax-free in the hands of the investor. However, the taxation does reduce the in-hand returns available to the investor.

Securities transaction tax (STT) is applicable when you sell units of equity mutual funds.

[Read: Key Reasons To Start Tax Planning Early This Financial Year]

How is tax on SIPs calculated?

When you invest via Systematic investment plan (SIP), there are multiple investment dates. In such cases, the `first-in-first-out' (FIFO) rule is followed to calculate the holding period.

For e.g., let's assume that you are holding 1000 units of equity mutual funds as a result of investing Rs 5000 every month starting from May 2018. Now if you want to sell 500 units, the units that you held in the month of May 2018, let's say 100 units, will be considered as redeemed first while the rest of units will be considered as redeemed in the following months.

Accordingly, units redeemed from the month of May 2018 will be treated as LTCG as it has completed 12 months, while the rest of redemption will be treated as STCG as you've had them for less than one year.

What should investors keep in mind?

Investors should fully understand the product details and tax implication of different types of assets before taking any investment decisions. Remember that each exit is treated as a sale and will be subject to the applicable tax rate.

You should therefore avoid unnecessary buying and selling of mutual funds. To avoid this, you should carefully select funds based on your financial objectives, risk profile, and time horizon of the goal.

[Read: When Is The Best Time To Sell Your Mutual Fund?]

You may also opt to invest in direct plans as they have a lower expense ratio compared to regular plans, which may increase your overall in-hand returns.

The tax rate on equity funds is lower in the long-term as compared to short-term. In case of debt funds too, tax on LTCG can be more advantageous if you fall in the highest tax slab. Therefore, you should stay invested for long-term to get the maximum benefit of your investment.

Author: Divya Grover



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