Mutual Funds have grown progressively in the past few years and now, many investors prefer investing in mutual funds as opposed to any other security. However, many investors are still unaware about the tax imlplications imposed on mutual funds.

Here is everything you need to know about the tax structure that mutual funds follow!

Types of Mutual Funds

From a tax perspective, mutual funds can be broadly categorized into 4 types:

Equity Funds:

  • +These are mutual funds which invest 65% or more in equity of Indian companies.
  • +Equity mutual funds are of different types like :
    -Multi-Cap
    -Large- Cap
    -Mid-Cap
    -Small-Cap
    -Sector-Oriented
    – Index Oriented
  • +Equity funds can have a long-term as well as short-term investment period. Therefore, the tax differs accordingly.
  • +Since these companies invest in equity and equity-related securities, they are riskier but  have given higher returns.

+All funds under this category are taxed in the same manner.

Debt Mutual Funds

  • +Any fund other than an equity mutual fund is known as a debt fund. Debt funds are the types of funds which invest in securities like treasury bills and bonds.
  • +Debt funds are of different types like :
    -Liquid Funds
    -Ultra Short Term Fund
    -Short Term Fund
    -Dynamic Mutual Fund
    -Credit Opportunities
    -Monthly Income Plan
    -Gilt
    -Income
  • +Debt funds are less riskier because they pose as a creditor to the company, but their returns are also comparatively less
  • +Even in debt funds, there can either be long term investment or short term investment taxes

+All funds under this category are taxed in the same manner.

Balanced Funds

  • +These are mutual funds which invest in a variety of assets and try to balance out their investing strategy, in order to moderate the risk:
  • +They are of two major types
    -Equity Oriented: It is a type of fund, wherein, the investment in equity and equity-related security is  minimum 65%
    -Debt Oriented: It is a type of fund, wherein, the investment in debt related securites is a minimum of 65%

Money Market/Liquid Funds:

  • They are a special kind of debt fund which invest in <90 days matured securities.
  • Dividend treatment for such schemes are different.

Gold Mutual Funds:

  • They invest in gold/gold based securities, but they are treated similar to debt funds from a tax perspective.

Short Term and Long Term

The definition of long-term and short-term is different for different types of mutual funds. Here is a table to help you understand that relation.

Type of Mutual Fund Short term Cap gain Treatment Long-term Cap gain Treatment
Equity or Balanced (>65% equity) Mutual Funds Less than 365 days 365 days or more
Debt Mutual Funds(Non-Liquid Schemes) Less than 3 years 3 years or more
Money Market and Liquid Schemes Less than 3 years 3 years or more
Gold ETFs Less than 3 years 3 years or more

 

Tax on Mutual Funds:

Type of Mutual Fund Short-term Cap Gain  Long-term Cap Gain  DDT* 
Equity or Balanced Mutual Funds 15% taxation under section 111A 10% on gains above Rs 1 lakh (no indexation benefit) Nil (As per section 115R)
Debt Mutual Funds (Non-Liquid schemes) Taxed as per individual tax slab of the investor 10% without indexation or 20% with indexation, plus 3% cess 25% plus 5% surcharge plus 3% cess, total: 27.038%
Money Market and Liquid Schemes Taxed as per individual tax slab of the investor 10% without indexation or 20% with indexation, plus 3% cess 25% plus 5% surcharge plus 3% cess, total: 27.038%
Gold ETFs Same as Debt Mutual Funds Same as Debt Mutual Funds Same as Debt Mutual Funds

*DDT stands for Dividend Distribution Tax. It is paid by the mutual fund house/company.

Tax on Mutual Funds, 2018 – After Budget 2018-19 (Update)

  • +Earlier, the tax on equity funds held for more than 1 year was zero.
    Starting now, if the gains are more than Rs 1 lakh, a tax of 10% will be applicable on the excess. There is no benefit of indexation.
  • +Also, gains made in existing mutual funds till 31st January 2018 will not be considered as a gain for tax calculation purpose.
  • +Only the gains which have been made after 31st January, 2018 will be taken into consideration for the calculation of tax.

The table above has been updated with the new applicable tax rate.

Hence, from a tax perspective, debt mutual funds score above FDs, in case tenure of investment is more than 3 years.

Happy investing!

Disclaimer: the views expressed here are those of the author. Mutual funds are subject to market risks. Please read the offer document before investing.