What is Equity Fund Taxation?

What is Equity Fund Taxation?

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This article discusses the concept of equity mutual fund taxation.

TLDR Points

  • Capital gains or profits on all equity mutual funds are taxable.
  • These profits are grouped into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).
  • Any gains less than a year come under STCG.
  • Anything more than a year is subject to LTCG.
  • ELSS (Equity-Linked Savings Schemes) qualify for a tax deduction under Section 80C of the Indian Income Tax Act.
  • LTCG on ELSS will apply under the current income tax rules.

Are you investing in equity mutual funds with an expectation of capital appreciation but are not familiar with the taxation norms yet? Read this article to know more about income tax on them.

The most important aspect of equity funds taxation is understanding how much income tax is applicable on the profits. We will first explain what these profits or capital gains are.

Capital Gains Tax in India

Capital gain is the amount you earn when you sell or exchange your assets at a profit. Note that the capital gain tax is only incurred when the asset is sold and not when you stay invested.

In India, capital gains tax is influenced by two factors – 

  • Type of mutual fund scheme
  • Tenure or holding period

For income tax purposes in India, a short term holding period for debt funds is up to 36 months. The short-term period for equity funds is up to 12 months. Which means the long-term holding for debt funds is greater than 36 months and more than 12 months for equity funds. Any profit you earn from the sale or exchange of these funds comes under capital gains.

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Tax on Equity Mutual Funds

The taxation is differentiated based on Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).

Short-Term Capital Gains

If you sell off your equity investment within a year, it is accounted for as a short-term capital gain. It is subject to STCG rate of 15% (plus 4% cess) irrespective of your income tax bracket.

Long-Term Capital Gains

LTCG is the equity investments that are redeemed after 12 months. They are tax-free up to Rs. 1 lakh in a financial year, beyond which they attract taxation of 10% (plus 4% cess) without any indexation benefit.

However, please note there are also tax-saving equity funds such as the Equity Linked Saving Scheme (ELSS funds). Such investments are exempt under Section 80C but come with a lock-in period of three years.

Tax on Dividend from Equity Mutual Funds

The Union Budget of 2020 changed the rules on tax on dividend from equity mutual fund in India. You need not pay a Dividend Distribution Tax (DDT) on equity mutual funds now, and the dividends are taxable in the hands of the investors. This amendment is likely to reduce the burden on small retail investors.

Following this, dividend income will be treated like normal income, which means that it will be taxable according to your income tax slab rate. If you earn an equity fund dividend of more than Rs. 5000, then the amount will be subject to 10% TDS at source if your PAN has been linked with Aadhar. If your PAN is not linked with Aadhar, the TDS will be 20%.

How to Declare Mutual Funds Investments in ITR?

Declaring your investment returns is easy. Just follow the steps detailed below

  • A salaried person with no capital gains accumulation needs to fill Form 1 along with Form 16.
  • A salaried person with accumulated capital needs to fill in Form 2.
  • If you are not a business owner but have additional income sources apart from your salary, Form 2 is for you as well.

Conclusion

Equity mutual fund taxation may sound intimidating at first, but once you get familiar, you will surely get the hang of it. Equity funds are ideal if you are looking for comparatively less risky investments that are safe from market volatilities. Download the digibank by DBS app and choose the most suitable scheme from over 200!

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Read up more on Mutual Funds here.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.

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