An investor gets access to diversified and professionally managed portfolios through mutual funds. Mutual funds are generally considered a safe form of investment, but it should be noted that they still carry some risk. The funds are managed by professional money managers. These professionals allocate the fund’s assets and try to generate income or capital gains for the investors. Mutual funds are beneficial to the small and individual investors who do not wish to bear much risk. Before you make an investment in mutual funds, you should be aware of how they are taxed. The income earned from the investments in mutual funds is taxed at different rates on the basis of where it is coming from.
How is income from mutual funds taxed?
You receive income from regular dividends and capital gain on the sale of shares when you invest in a mutual fund. Dividends earned by the investors are added to their taxable income, and they are taxed at their respective income tax slab rates. The holding period and the type of mutual fund decides the taxation on capital gains arising from mutual funds. Holding period refers to the amount of time for which the investor holds the mutual fund units.
The tax rate also depends on which type of fund you are investing in. .For instance, debt funds are mutual funds where the portfolio’s debt exposure is in excess of 65 per cent. Short-term capital gains, earned on redeeming the debt fund units within 36 months, are added to the taxable income and taxed at your income tax slab rate. Long-term capital gains, received on the sale of debt fund units after a holding period of 36 months, are taxed at a flat rate of 20 per cent post indexation.
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On the other hand, equity funds are those funds in which the portfolio’s equity exposure exceeds 65 per cent. Short-term capital gains earned on redeeming the equity fund units within a 12-month holding period, are taxed at a flat rate of 15 per cent. Long-term capital gains of up to Rs 1 lakh a year on the sale of equity fund units after a 12-month holding period, are exempted from tax. Long-term capital gains more than the Rs 1 lakh limit will be taxed at a rate of 10 per cent.
