10 things to note for filing income tax on mutual fund investments

Mutual fund investments have been growing in number year on year. Taxpayers use them as tax saving instruments to help reduce the impending tax burden.

However tax liability on mutual funds need to be addressed as well.

To put it simply ‘whenever there will be income, there will be tax,’ says tax solutions website, ClearTax.

10 things to note for filing income tax on mutual fund investments

“Even though you can minimise the tax that you pay, there is no escaping it. The gains that you earn from your mutual fund investments are also a form of income (capital gains) and they too are taxed (capital gains tax). The taxation on mutual fund gains vary as per the holding period and depending on the type of mutual fund,” a report by ClearTax said.

Asset under management of Indian mutual fund industry has grown from Rs 5.87 lakh crore as on 31st March, 2012 to Rs 21.41 lakh crore as on 31st October, 2017, a report by NDTV said on Saturday.

With the financial year coming to a close in a few short months, many might rush to hand in their investments but here are 10 things about income tax rules pointed out in the report that you need to know.

1. More equity, more taxes: Mutual fund portfolios that comprise of 65% or more in equity-related instruments, are considered equity funds.

“Gains on equity funds qualify as long-term gains after the units have been held for a period of 12 months. Long-term gains from equity funds are completely tax-free. This includes tax-saving mutual funds–ELSS funds. This means that if you hold your equity fund investments for over a year, you don’t have to pay any long-term capital gains tax (LCGT) on the gains you earn. Short-term gains from equity funds, if the units are redeemed before 12 months, are taxed at a flat short-term capital gains tax (SCGT) rate of 15%,” ClearTax report said.

2. Arbitrage funds equal equity funds: In the eyes of the taxman, arbitrage funds are also considered equity funds. Their holding period for long-term capital gain is one year. The NDTV report said if a balanced fund invests minimum 65% in equities, it is considered an equity fund for tax purpose.

3. Long-term capital gains: For those equity mutual fund units that are being held for more than a year, they are considered as long-term capital gains. On these kind of gains there is no tax levied.

4. Short-term gains: The report added that for periods less than a year, short-term capital gains tax is applicable at 15% on the gains from equity funds.

5. Dividend income: Dividend income from equity mutual funds is tax-free, irrespective of when you receive it, the report added.

“Any income received from domestic company in form of dividends (dividends as referred in sec. 115-O) is exempt from tax up to Rs. 10 Lakhs,” a report by ClearTax said.

6. Debt mutual funds: Short term capital gains tax on these funds will be levied as per tax slabs, while long term gains are levied on 20% after tax incidence.

However these funds are considered long term only if they are held for more than three years.

7. Benefit of indexation: Benefit of indexation on their original debt fund investment means that the original investment is adjusted for the price of inflation and taxed accordingly.

“Long-term gains, which is gains on debt fund units held for over 36 months, are subject to long-term capital gains tax (LCGT) at the rate of 20% after indexation. Indexation is a method of factoring in the rise in inflation between the year when the debt fund units were bought and the year when they are sold. Indexation allows the tax on debt fund gains to come down significantly,” ClearTax explained.

8. Be careful: The report goes on to pointing out that if debt mutual fund investments are redeemed or sold before three years, the short-term gains are taxed according to your tax slab.

9. Income from debt funds: Again, income from debt funds also come in the form of dividends.

10. Mutual fund houses: These pay dividend distribution tax at the rate of 28.84% (including surcharge and cess) before handing out the dividends to investors.