10/09/2017 How are your mutual fund returns taxed - The Economic Times

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8
How are your mutual fund returns
taxed
By Aakar Rastogi, ECONOMICTIMES.COM | Oct 31, 2016, 11.23 AM IST

The returns earned from mutual funds are taxed

under the head 'Income from Capital Gains.'

Many mutual fund investors are a bit confused

about the taxation of returns from investments.
Investment experts are always busy answering
questions like should I pay tax on my mutual
funds or will my investment qualify for a tax
deduction. Experts say the different treatment of MF returns for calculating the SPOTLIGHT
tax liability is the main reason for the confusion.
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The returns earned from mutual funds are taxed under the head 'Income from
Capital Gains.' And capital gains can be short-term or long-term based on the
holding period of investments. And tax rates are different for both. Moreover,
the capital gains rules are different for equity and non-equity schemes.

All that sounds too confusing? Don't worry. We will make it easy for you.

Taxation of equity schemes

A mutual fund scheme qualifies to be taxed as an equity scheme if it invests at Firms give bereavement leave
least 65 per cent of the total corpus in equity and equity related instruments. to help staff cope with loss
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Returns from an equity mutual fund are treated as long term capital gains if provide support to employees through v
investments are held for more than a year. Such returns are completely exempt counselling, if required, for their emotional
well-being.
from income tax according to the current laws.
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However, if investments are held for one year or less, the returns are taxed Potential social cost of a 100% e-vehicle
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under short term capital gains. Such returns are taxed at 15 per cent.

Taxation of debt schemes

Mutual fund schemes that invest less than 65 per cent of the corpus in equity
are categorised as non-equity funds for the purpose of taxation. Your debt
mutual funds fall under this category.
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Also, gold funds, fund of funds, international funds, etc are categorised as non- Sebi may bring in rules for merger of mutual fund
8 equity schemes for the purpose of taxation. schemes
Comments
What to do when you have doubts about your
Returns from non-equity funds are treated as long-term capital gains if mutual fund investments

investments are held for more than three years. And the returns are taxed at 20 Top 10 mutual fund managers who created the most
per cent with the indexation benefit. Indexation is a procedure of inflating the wealth for investors

purchase cost to account for inflation with the help of a price index. The process MF Portfolio Doctor: Hike SIPs to reach goals
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If investments are held for three years or less, the returns are treated as short- More »
1 How are your mutual fund returns taxed
term capital gains. Such gains are added to the income and taxed as per the
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10/09/2017 How are your mutual fund returns taxed - The Economic Times

income tax rate applicable to the investor.

Taxation of hybrid schemes

Hybrid schemes can be either equity-oriented or debt-oriented. The scheme
information document would clearly specify the investment pattern, making it
clear whether the scheme qualifies to be an equity fund or a debt fund.

Needless to say, you should pay attention to this factor while investing in a
hybrid scheme because the tax liability is very different for equity and non-
equity schemes.

How to calculate the holding period?

8 Holding period is determined from the date of purchase of mutual fund units till
the day you sell them. In case of a Systematic Investment Plan (SIP), you are
purchasing certain number of units every month or quarter and the period of
holding has to be calculated individually for all these purchases.

For example, you have started an SIP in an equity scheme from January to
June 2016. Units purchased in June 2016 will complete one year for the
purpose of taxation only in June 2017, not January 2017.

How are dividends taxed?

If you have invested in a mutual fund scheme under the dividend option, you
may receive dividends. You don't have to pay any tax on them as dividends are
exempt from income tax in the hands of the investor in both equity and a debt
schemes.

However, mutual fund houses pay Dividend Distribution Tax of 28.84 per cent
on dividends declared under debt schemes. In that sense, your dividends from
debt funds are taxed.

READ MORE ON » Tax Return Filing Taxation Short Term Capital Gain Non Equity Schemes

Mutual Funds MF Long Term Capital Gain Equity Funds

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- Returns less then 1 year are absolute and above 1 year are annualised.

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