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Saturday, October 9, 2010

Taxation on your Mutual Fund Investments

One key point to keep in mind when investing, is how that investment is going to be taxed.

Given below are the facts you need to know regarding taxation of mutual funds:

Equity Funds

As an investor if you have opted for the dividend option, for the reason that you want cash inflows to be managed through dividends, then the dividends which you received under the scheme is completely exempt from tax under section 10(35) of the Income Tax Act, 1961.

If you are caught in the wrong habit of short-term (period of less than 12 months) trading, then you better be ready to forgo your profits/capital gains, if any, in the form of Short Term Capital Gains (STCG) tax. STCG are subject to taxation @ 15% plus a 3% education cess.

If an investor deploys his money for long-term (over a period of 12 months) and thus subscribe to a good habit of long-term investing, then there is no tax liability towards any Long Term Capital Gain (LTCG)

If an investor deploys his money in an Equity Linked Saving Scheme (ELSS), then he enjoys a tax deduction under section 80C of the Income Tax Act, which enables him to reduce his Gross Total Income (GTI). However, this benefit can be availed by investors upto a maximum sum of Rs 1,00,000. Also at the time of exiting (after 3 years of lock-in) from the fund the investor will not be liable to any LTCG tax

Investors will also have to bear a Securities Transaction Tax (STT) @ 0. 25%; this is levied at the time of redemption of mutual fund units.

Debt Funds

Similarly, in a debt funds too, if investors have opted for the dividend option, to manage your cash inflows, then the dividend which the scheme declares will be subject to an additional tax on income distributed. Hence, in such a case investors are actually paying the tax indirectly.

Unlike equity funds, in debt funds, investors are liable to pay a tax on their Long Term Capital Gains (LTCG), which is 10% without the benefit of indexation and 20% with the benefit of indexation.

Similarly, in case of Short Term Capital Gains (STCG), the individual assesses will be taxed at the rate, in accordance to the tax slabs. Unlike in case of equity mutual funds, investors will not have pay any Securities Transaction Tax (STT)