Mutual fund AUMs are increasing day by day and it touches new high almost every day. You may have started SIP to invest in a mutual fund. But do you know what will be the tax implication during accumulation or at the time of redemption of mutual fund unit. Wait, I am not here to bombard you with the complex taxation of mutual fund investing. This article will be helpful for you to access the right amount tax and so the return on investment.
I am pretty sure that you all know the various types of mutual funds. Here, we will take two broad types of mutual funds, Equity and Debt Mutual funds to understand.
According to Wikipedia “A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was greater than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals, and property.”
The above defined capital gain tax is also applicable for mutual fund units. To calculate the capital gain tax first you should know what capital gain is. Capital gain is the difference between higher selling price and lower purchase price. Based on the tenure there are two types of capital gain.
- Short Term capital gain (STCG) on Debt Funds
If debt fund units are held for a period of less than 3 years or 36 months and sell, the capital gain generated by selling the asset is called short term capital gain.
- Long Term Capital gain (LTCG) on Debt Funds
If debt fund units are held for a period of more than 36 months and sell, the capital gain generated by selling is termed as long term capital gain.
Capital gain tax on Mutual Funds
Capital gain tax calculation is a difficult part for many salaried individuals. Though there are multiple income tax calculators are available in the open source, we face lot of difficulties while calculating the capital gains. Many individuals omit these taxes due to ignorance of how to do the calculations or proper information.
Now, we will look on capital gain tax on equity mutual funds.
If you hold a mutual fund for less than one year and sell, the profit is termed as short term capital gain and it is taxed at a flat rate of 15% of gains.
If you remain invested for more than one year, it will be termed as long term capital gain. Income tax is free up to Rs 1 lakh on Long term capital gain from equity mutual funds. Earlier the long term capital gain from equity mutual fund was completely tax free.
If you have mutual fund units which were bought before 31st January 2018, the NAV of 31st January 2018 can be taken for calculating the capital gain and capital gain tax.
In case of SIP, every purchase/ transaction is considered as fresh purchase and the capital gain tax is to be calculated based on that date. It is a cumbersome calculation. Don’t worry. When you redeem a mutual fund the fund houses has option of calculating the applicable capital gain tax in the portal which will ease your job.
You can regularly redeem the mutual fund and can take the benefit of Rs 1 lakh per financial year tax free long term capital gain.
This calculation is very different for debt mutual funds. Both Short term and long term capital gains are taxed for debt mutual funds. Short term capital gain is taxed according to the individual’s tax slab i.e. as high as 30% if you are in the highest tax bracket. Long term capital gain is taxed at a rate of 20% with indexation benefit and 10% without considering indexation benefit (currently only applicable for NRI investors). For debt mutual fund the short term is considered for less than 36 months and long term is considered for more than 36 months.
Suppose, you have invested Rs 1,00,000 in a debt fund on 3rd July, 2014 and sold it on 21st August, 2018 at Rs 1,30,000.
Indexed cost of investment = (280/240) x 1,00,000 = Rs 1,16,667
Long Term Capital gain = Rs 13,333
Hence, Long Term capital gain tax = 20% of Rs 13,333 = Rs 2667
If, you don’t want to take indexation benefit, the Long term capital gain tax = 10% of Rs 30,000 = Rs 3000.
From the above example, It is advisable to take indexation benefit while calculating the Long term capital gain tax.
The long term capital gain tax on equity mutual fund is certainly a big setback for long term investors. But considering the past return on investment, the equity mutual fund is still a good bet to create wealth for a longer term.