Mutual funds are one of the most vibrant investment instruments in India. The number of investors and assets under management in this sector is rising rapidly in tandem with the growth in the equity markets of the country.
Equity mutual funds are taxed depending on how long the investor holds the investment before selling the units.
Capital gains and their types
If a profit is made on the sale, capital gains are made. As in any other assets, the government levies taxes on capital gains. Capital gains are of two types – long-term (LTCG) and short-term (STCG).
LTCG is applicable when the units are held for more than a year. STCG is applicable when the units are sold within a year of purchase.
The important point to note is all capital gains up to Rs 1 lakh a year is tax free. But beyond that limit, LTCG is taxed at 10% for equity funds (funds that invest 65% of their money in equity), irrespective of your income tax bracket. The STCG rate is also flat at 15%.
Debt funds are taxed differently. Capital gains from debt funds are added to the taxable income and taxed at the slab rate.
The tax treatment of hybrid or balanced funds depends on the extent of equity exposure of the portfolio. If it exceeds 65%, then the fund scheme is taxed like an equity fund. If it doesn’t, the rules of taxation of debt funds apply.
Do mutual funds save income tax?
In short, the answer is yes, they do. But all mutual funds don’t offer tax benefits. Only a certain category does. This category of mutual funds, which offers tax breaks, is called Equity Linked Savings Scheme or ELSS. No other type of mutual funds allows income tax deductions.
Do mutual funds come under Section 80C?
ELSS funds are equity diversified funds. The tax-saving character is derived from Section 80C of the Income Tax Act, 1961 and therefore one can invest a maximum of Rs 1.5 lakh a year for IT relief.
Most important, one does not compromise on returns if one invests in ELSS funds. In March this year, it was reported that ELSS funds registered an average return of 18.50% over the past 5 years and 17.05% over the past 10 years.
However, ELSS funds have a three-year lock-in period.
Mutual funds are taxed depending on the nature of the scheme one invests in. A particular category of funds also allows tax deductions for the investor according to Section 80C of the Income Tax Act 1961. Business Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
