Mutual Funds can provide earnings in two forms- Capital Gains and Dividends. While capital gains are taxable at the hands of investors, the tax on mutual funds dividends, called Dividend Distribution Tax (DDT) is paid by the fund house (Asset Management Company) on behalf of the investors.
Mutual Funds Capital Gains Taxation for FY 2019-2020
A capital gain refers to the difference between the value at which an investor purchased the units of a mutual fund scheme and the value at which he/she sold or redeemed them. For instance, Mr. X invested Rs. 1 lakh in a mutual fund scheme on April 1, 2016, and the value of his investment on April 1, 2019, is Rs. 1.5 lakh. Then, he has earned a capital gain of Rs. 50,000.
The mutual funds capital gains taxation depends on the type of mutual fund scheme and the investment tenure. On the basis of investment tenure, there are two types of capital gains tax – Short Term Capital Gains Tax (STCG) and Long Term Capital Gains Tax (LTCG).
|Type of Scheme||Particulars||Short Term Capital Gains Tax||Long Term Capital Gains Tax|
|Equity oriented schemes||Holding Period||Up to 12 months||More than 12 months|
|Non-equity oriented schemes||Holding Period||Up to 36 months||More than 36 months|
|Tax Rate||Income Tax Slab Rate of Investor||20% after indexation|
*Long-term capital gains on equity mutual funds are exempt up to Rs. 1 lakh per annum. For example, if your long-term capital gain in FY 2018-19 is Rs 1.5 lakh, only Rs. 50,000 will be taxable as LTCG.
Let’s understand indexation better with the help of an example. Assuming that Mr. X invested Rs. 100 in a debt fund in FY 2015-16 and sold it for Rs. 150 in FY-2018-19. Since Mr. X sold it after 3 years, the gain is long term and an LTCG tax of 20% with indexation is applicable. The CII in FY16 was 254 and in FY19, it was 280. As a result, Mr. X’s purchase price for tax purposes will be raised to (280/254)*100 = 110 and his taxable gain will be 150 – 110 = 40. The tax payable will be 20% of 40 = Rs. 8 and not Rs. 10 (20% of 50).
- Capital losses incurred on a mutual fund scheme can be adjusted against the capital gains earned on another mutual fund investment of the same year. This set-off cannot be done against any other head of income.
- Short term capital losses can be adjusted against both long term and short term capital gains. However, long term capital losses can only be adjusted against long term capital gains.
Mutual Funds Dividends Taxation for FY 2020-2021
Dividend is a part of the profit that a company earns and distributes amongst its investors. Dividend Distribution Tax is a liability that a company must pay to the government according to the dividend paid to the company’s investors.
As of FY 2019-20, DDT is payable to the government not by the investor but by the fund house managing the mutual fund. In most schemes, DDT rate is around 30%. However, according to the recent budget for FY 2020-21, Dividend is taxable at the hands of the investor and not the fund house. Hence, as it stands DDT has been abolished under the new tax regime.
Tax Benefit of Mutual Funds
Equity-Linked Savings Scheme (ELSS) is a type of equity fund and the only mutual fund scheme which qualifies for a tax deduction of Rs. 1.5 lakh per annum under Section 80C of the Income Tax Act. An ELSS comes with a lock-in period of 3 years which means an investment made in it cannot be withdrawn before 3 years.
Securities Transaction Tax (STT)
A Securities Transaction Tax (STT) is applicable at the rate of 0.001% on equity oriented mutual funds at the time of redemption of units. An investor is not required to pay STT separately as it is deducted from the mutual fund returns.
List of Top Tax Saving (ELSS) Mutual Funds for FY 2020
|Fund Name||3 Year Returns||5 Year Returns|
|Mirae Asset Tax Saver||19.82%||–|
|Axis Long Term Equity Fund||19.21%||13.20%|
|Tata India Tax Savings Fund||17.50%||13.76%|
|Motilal Oswal Long Term Equity Fund||17.13%||–|
|Invesco India Tax Plan||15.52%||11.98%|
|DSP Tax Saver Fund||15.25%||12.08%|
|Aditya Birla Sun Life Tax Relief 96||14.83%||11.54%|
|Kotak Tax Saver||14.57%||11.03%|
|IDFC Tax Advantage Fund||13.54%||9.95%|
|L&T Tax Advantage Fund||12.86%||9.79%|
|ICICI Prudential Long Term Equity Fund (Tax Saving)||12.45%||9.40%|
|Principal Tax Savings Fund||11.90%||9.03%|
|Franklin India Taxshield Fund||11.48%||8.96%|
|SBI Magnum Taxgain Scheme||9.84%||6.98%|
|Reliance Tax Saver Fund||7.08%||4.67%|