I want to understand how much I can invest in mutual funds without worrying about the tax?Asked
Any mutual fund that invests more than 65% of its corpus in equity or equity related instruments are considered as equity mutual funds. If an investor redeems investment after 12 months it is considered to be long term and the no tax is charged on long term capital gains.
However, if withdrawn prior to the completion of 12 months, it is considered as short term and tax is charged at 15%.
In case of debt funds, they are considered as long term only if held for more than 3 years. These funds are charged at a rate of 20% for long term capital gains and according to the investors tax slab in case of short term capital gains.
Tax implication will vary depending on the type of mutual fund.
So to conclude, tax implications depends upon:
Note: In case of systematic withdrawal plans, tax treatment will remain the same as redemption or withdrawal from equity and debt funds
Hope this helps, thanks.
Returns from mutual funds investment can be maximised by knowing their tax implications. For this purpose, we can divide the discussion in 3 parts:
Equity Mutual Funds
A mutual fund investing 65 per cent or more of its portfolio in equities or equity-related instruments, are considered equity funds. Long term investments are currently tax free. These are the investments you keep invested for more than 12 months. But if you sell or redeem your equity mutual fund investments before that, you will have to pay short-term capital gains tax at a flat rate of 15 per cent. Another way is to opt for the dividend option while investing in equity funds. Dividend income is tax free.
Debt Mutual Funds
A long term debt mutual fund is the one that is held for at least three years. Currently, the long-term capital gain tax on debt funds is at the rate of 20 per cent. However, the income is first indexed against inflation to give a tax benefit to the investor. Although, if debt mutual fund investments are redeemed or sold before three years, short term capital gain tax applies and it is taxed according to your tax slab. A dividend option can be availed here as well which is again tax free in the hands of the investors.
Systematic Withdrawal Plans
Systematic withdrawal plans (SWP) refers to investors redeeming fixed units at regular intervals and the amount getting credited to their bank accounts. This happens on a First In First Out (FIFO) basis. The tax treatment remains the same as redemption or withdrawal from equity and debt funds.
Thus, more than the amount that you invest, it depends on the kind of investment you make and the time period for which you keep it intact helps to decide the tax liability.