As an investor, if you are willing to earn market-linked returns that potentially counter inflation and help accomplish the envisioned financial goals, then mutual funds are a potent investment avenue for you provided you are willing to take some calculated risk.“In this world nothing is certain but death and taxes” – Benjamin Franklin
To compute what is the tax impact of investing in mutual funds, using a tax calculator serves very handy.
The mutual fund tax calculator is an online tool that facilitates you to know the tax impact whether it is dividends (now known as Income Distribution cum Capital Withdrawal or IDCW) and/or the capital gains you have earned (Long Term or Short Term, depending on the holding period) from a mutual fund.
Well, being an online tool, it is very easy and convenient to use. All you got to do is select the plan you opted for (Direct or Regular), the name of the mutual fund scheme, the option (Growth or Dividend), the amount invested, the date of investment, and the date of sale of the units.
Once all these details are entered, the online calculator at the backend performs the calculations and in a matter of few seconds shows the results, i.e. your tax liability (if any), as under:
As regards the capital gains tax on mutual funds is concerned, whether it would be treated as Short Term Capital Gains (STCG) Tax or Long Term Capital Gains (LTCG) Tax will depend on the holding period and type of scheme.
If the realised gains in the case of an equity-oriented fund are made in less than 12 months of the holding period, it is called Short Term Capital Gains and is taxed at a flat rate of 15%.
But if your holding period is more than 12 months or more in an equity-oriented fund, then it shall be referred to as Long Term Capital Gains and taxed at 10% if the realised gains are over Rs 1 lakh in the financial year. In other words, realised LTCG of equity-oriented funds will not be taxed if the sum is less than Rs 1 lakh in the respective financial year.
In the case of non-equity funds (or debt-oriented funds), if the holding period is less than 36 months it will be termed as Short Term Capital Gains and the realised capital gains will be added to your Gross Total Income and taxed as per your applicable income-tax slab rate.
But when the holding period is 36 months or more for non-equity or debt-oriented funds, the realised capital gains will be taxed at 20% Long Term Capital Gain tax with indexation benefit.
Indexation (based on cost on inflation index under Section 48 of the Income Tax Act, 1961) is the adjustment in the purchase price of an investment to reflect the inflation impact on the purchase value. With indexation benefit, you lower the long-term capital gains and bear lesser tax liabilities.
|Type of Mutual Fund||Short-Term Capital Gains||STCG Tax||Long-Term Capital Gains||LTCG Tax|
|Equity-oriented||Less than 12 months||15%||12 months and above||10% (for realized gains above Rs 1 lakh)|
|Non-equity-oriented (Debt-oriented)||Less than 36 months||As per your tax slab||36 months and above||20% (with indexation benefit)|
Note, gold ETFs and gold saving funds are also classified as ‘non-equity’ funds and thus the aforementioned capital gains tax rule applies to them.
Further, keep in mind that if you are an NRI the capital gains on mutual funds will be subject to Tax Deduction at Source (TDS) at the rate of 15% in the case of STCG and 20% for LTCG (with the indexation benefit available).
The income in the form of dividends from mutual funds (now called IDCW) will be taxed as ‘Income from Other Sources’ as per your income tax slab rate.
If the dividend amount is above Rs 5,000 dividend will be subject to TDS as per Section 194K @10% for resident individuals, but if the PAN is not provided then @20%.
In the case of an NRI (Non-Resident Indian), the TDS rate will be as per section 195 @20% tax plus the applicable surcharge and cess.
Taxes on your mutual fund investment are not wholly tax-free. But by engaging in thoughtful investment planning, perhaps you can lower the tax impact. If equity mutual funds units are held for the long term and the LTCG is below Rs 1 lakh in the financial year, there will be no tax.
Similarly, if you opt for the growth option -- which ideally should be your preferred option -- there will be no question of paying tax on the income distribution and cash withdrawal. So, what is necessary on your part as an investor is prudent planning.
Yes, that is possible. To save tax (and at the same time grow your money) consider investing in Equity Linked Savings Scheme (ELSS)––also known as a tax-saving mutual fund.
They are equity-oriented mutual funds that come with a mandatory 3 years lock-in period. In other words, your money invested in an ELSS cannot be withdrawn for three years.
The investment in ELSS can help you avail of a deduction of up to Rs 1.50 lakh (from the Gross Total Income) under Section 80C of the Income Tax Act, 1961 in the financial year in which the investment is made.
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