How does taxation work for Mutual Fund investments?

Please explain for equity scheme as well as non-equity scheme.

  1. Equity Funds

Equity funds essentially means any fund which has more than 65% invested in equity. For example, large cap funds, small cap funds, balanced funds(equity oriented), etc.

  • Short Term Capital Gains(STCG) of 15% will be applicable if the units are sold within 1 year of allotment.

  • Long Term Capital Gains(LTCG) will be 0 if the units are sold after 1 year of allotment.

  • Dividends received are exempt from tax

  • Short - term capital loss can only be offset against STCG or LTCG

  • Long - term capital cannot be offset against LTCG as there is no tax on LTCG

  1. Non - Equity Funds

This are funds in which the percentage of equity investments is less than 65%. ex : debt schemes, liquid schemes, etc.

STCG will be applicable as per the tax bracket.

  • LTCG will be applicable at 20% after indexation. Indexation means to adjust the cost of purchase as per the inflation index number which the government releases every year. Lets assume, you purchased a unit at Rs 100 in 2016 and sold the unit at Rs 150 in 2020. Also, cost inflation index is 1000 for 2016 and 1200 for 2020 respectively. Then indexed cost of acquisition is (100*1200)/1000 is now Rs 120. The capital gains post indexation is Rs 150 - 120 = Rs 30 (instead of 150 - 100). So, 20% tax on 30 is Rs 6 per unit.

  • Dividends from non-equity schemes will be given after deducting DDT (Dividend DistributionTax) which is 28.84%. So, it is best to choose a growth oriented scheme in this case.

  • Short - term capital loss can be offset with STCG or LTCG

  • Long - term capital loss can be offset with LTCG

In both the cases, the capital loss cannot be offset against any Head of Income.

In case of any ambiguity, you can consult your tax advisor or consultant :slight_smile: