How are Mutual Fund Investments Taxed?

How are Mutual Fund Investments Taxed?

There are many ways of investing money in the capital market. One way is to place your money in mutual funds. Mutual fund investors receive dividends on the fund units that they hold. They may also earn a profit when the value of their holdings appreciates, leading to capital gains. The difference between your initial buying price and your selling price is your capital gain.

There are two categories of capital gains based on how long you stay invested: short-term capital gains (STCG) and long-term capital gains (LTCG). Both of these categories are taxable. The mutual fund tax rates are determined by the type of fund and the holding duration. When it comes to equities, a holding period of less than a year is short term and that exceeding a year is long term. In case of debt funds, a holding duration of up to three years is considered short term, whereas durations beyond three years are long term.

Mutual fund tax on capital gains

Let’s look at the tax rates for capital gains from mutual funds. India imposes different taxes for equity and debt funds.

Equity funds:

STCG is taxable at 15%.

LTCG of up to Rs 1 lakh is tax-free. Any LTCG beyond the Rs 1 lakh exemption attracts a 10% tax rate.

Debt funds:

STCG is counted as part of the investor’s total taxable income. You are taxed according to the relevant income tax slab.

LTCG is taxed at 20% after indexation.

Calculating indexed acquisition cost

What is indexation? It factors in inflation when calculating the acquisition cost. The cost of acquisition of units is adjusted according to the Cost Inflation Index (CII). Hereis the formula:

Indexed Cost of Acquisition (ICoA) = Purchase Price x (CII of Year of Sale or Purchase)

Once you factor in …

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