How to calculate tax on mutual fund redemption?
Mutual funds are a popular investment method because they can help you reach your financial goals. Mutual funds are also tax-efficient products. When you invest in fixed deposits, the returns are added to your income and taxed according to your income tax slab rate. This is especially bad if you are in the highest income tax bracket. Here, mutual funds do a better job. When you put your money into a mutual fund, your money is managed by experts, and your returns are tax-efficient.
How Are Mutual Funds Taxed?
The gains from mutual fund investments are taxable similarly to those from other asset classes. Before making any investments, you should know the ins and outs of the mutual fund tax structure. Learning how mutual funds are taxed can allow you to make smart financial decisions that will reduce your overall tax bill. In addition, there may be opportunities for tax savings. While investing in a mutual fund, it is important to keep in mind the restrictions on taxation.
What Determines Tax on Mutual Funds?
Mutual fund taxation is complex, but understanding the variables at play might help. A mutual fund’s tax rate is affected by the following key variables:
- There are two distinct categories of mutual funds that each have their own set of tax implications. There are two main types of mutual funds: those that invest in debt and those that invest in stocks.
- A dividend is a portion of the accumulated earnings that is delivered by mutual fund companies to the participants in the scheme. Investors get their share of the dividend. The investor is in no way compelled to liquidate their holdings as a result of this. I
- Capital gains are the term given to the profit made by investors on the sale of their capital assets at a greater price value than the asset’s original cost.
- India’s income tax rules say that if you hold on to your investment for a long time, you will only have to pay a small amount of tax. So, how much tax you have to pay on your capital gains depends on how long you hold on to them. The less tax you have to pay, the longer you keep an asset.
Equity Funds Taxation
Equity funds are a kind of mutual fund that has an equity exposure of more than 65% of their portfolio. As was just said, if you redeem your equity fund units during a holding period of one year, you would realize profits on your investment that are considered to be short-term capital gains. These profits are subject to taxation at a fixed rate of 15%, regardless of the income tax category that you fall into.
When you sell your equity fund units after having held them for a period of at least one year, your earnings fall under long-term capital gains. For LTCG, Rs.1 lakh of capital gains made each year are free from taxation. Any long-term capital gains over this ceiling will be subject to a long-term capital gains tax at a rate of 10%, and indexation will not be granted as a benefit.
Debt fund taxation
Your returns come under short-term capital gains when you sell your debt fund units before three years have passed. These gains are added to your tax and taxed income at the rate for your income tax slab.
When you sell units of a debt fund after having them for three years, you are subject to long-term capital gains. After indexation, these gains are taxed at a flat 20%. You are also charged the appropriate cess and tax surcharge.
Mutual fund & SIP units become more tax-efficient the longer they are held. The tax on long-term capital gains is less than the tax on short-term capital gains.