In India, we have to pay tax for profits and other earnings such as house rent or gain on stocks. The same applicable for mutual funds as well. We have to pay tax for mutual fund earnings. In this post, we would discuss on tax on mutual funds earning and how to minimize that by investing in mutual funds for more than 3 years. Tax on mutual funds calculated based on investment term on mutual funds.
Long Term Investments :
- Investment in Equity or balanced mutual funds(65% in equity market) for more than 1 years considered as long term investment.
- Investment in Debt mutual funds for more than 3 years considered as long term investment.
Short Term Investments :
- Investment in equity or balanced mutual funds for less than 1 years. (OR)
- Investment in debt mutual funds for less than 3 years.
Tax on long term investments:
The return from equity mutual funds or balanced/hybrid mutual funds (with 65% in equity market) would be taxed 10% on gain if investment is more than 1 years. That 10% is calculated only if gain more than 1 lakhs. The return from debt mutual funds would be taxed 20% of gain if investment is more than 3 years. 20% tax applicable with benefit of indexation.
Long term investment taxed 10% on Equity Mutual funds.
Tax on Short Term Investments :
The gain from equity oriented mutual funds would be taxed 15% if investment horizon is less than 1 year. For debt mutual funds with less than 3 years investment, calculated tax based on income tax slab of the investor. Debt mutual funds provides returns better than fixed deposit as well as it saves taxes.
Fixed deposit interest taxable based on income tax slab of the investor. But Debt fund investment for more than 3 years, it taxed 20%
Tax on Tax-Saving Equity Funds :
Equity-Linked Saving Scheme (ELSS) are the most efficient tax-saving instruments under Section 80C of the Income Tax . These are diversified equity funds which invest in equity shares of companies across market capitalization. ELSS comes up with a lock-in period of 3 years. It means that once you invest in ELSS, you cannot redeem your units before expiration of 3 years. we can claim a tax deduction of up to Rs 1.5lakh and save taxes up to Rs 45000 by investing in ELSS.
Upon redemption after 3 years, the long-term capital gains (LTCG) up to Rs 1 lakh are tax-free in your hands. LTCG in excess of Rs 1 lakh is taxed at the rate of 10% without the benefit of indexation.
ELSS mutual funds returns taxed as same as Equity mutual funds.
The mutual funds taxation depends on how long you have held the fund and what type of fund it is.
|Fund Type||Holding Period for Long Term||Short Term||Long Term|
|Equity Fund||1 year||15% (less than one year)||10% ( more than one year)|
|Balanced Funds (or) Hybrid funds||1 year||15% (less than one year)||10% ( more than one year)|
|Tax Saving ELSS Funds||10% tax for ELSS funds (Lock-in period 3 years for ELSS funds)|
|Debt Mutual funds||3 years||Slab rate(less than 3 years)||20% with indexation|
|Liquid Funds||3 years||Slab rate(less than 3 years)||20% with indexation|
Key Points on mutual funds investments :
- Invest for longer term to get better returns and tax saving.
- Each SIP investment considered as individual investment. Each equity SIP investment should be invested in mutual funds for at least 1 year to be considered as long term investment.
- Don’t invest all your money in debt mutual funds if you are in 30% tax slab.