Tax Benefits Of Mutual Fund Investment

Mutual funds are one of the foremost buzzing investment options as they assist you to achieve your financial goals. Mutual funds also are tax-efficient instruments. Investing in fixed deposits could be a great disadvantage, particularly if you comprise the very best taxation bracket because the interest is added to your taxable income and taxed at your taxation slab rate. this can be where mutual funds score better. after you invest in an open-end fund, you get the advantage of expert money management and tax-efficient returns.

Tax Benefits Of Mutual Fund Investment

Table of contents

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• Taxation of Dividends Offered by Mutual Funds

• Taxation of Capital Gains Offered by Mutual Funds

• Taxation of Capital Gains of Equity Funds

• Taxation of Capital Gains of Debt Funds

• Taxation of Capital Gains of Hybrid Fund

• Taxation of Capital Gains When Invested Through SIPs

• Securities Transaction Tax (STT)

How does one Earn Returns in Mutual Funds?

Mutual funds propose investors’ recoveries in two forms; incomes and money gains. Dividends are paid out of the profits of the corporate if any. When the businesses are left with surplus cash, they’ll commit to sharing the identical with investors within the sort of dividends. Investors receive dividends proportional to the amount of investment company units held by them.

A financial gain is the profit realized by investors if the terms of the safety held by them are bigger than the acquisition price. In simple terms, capital gains are realized because of the appreciation in the price of the investment company units. Both dividends and capital gains are taxable within the hands of investors of mutual funds.

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Taxation of Dividends Offered by Mutual Funds

As per the amendments made within the Union Budget 2020, dividends offered by any investment trust scheme are taxed in a classical manner. That is, dividends received by investors are added to their taxable income and taxed at their respective tax slab rates.

Previously, dividends were tax-free within the hands of investors because the companies paid dividend distribution tax (DDT) before sharing their profits with investors within the type of dividends. During this regime, dividends (received from domestic companies) of up to Rs 10 lakh a year were tax-free within the hands of investors. Any dividends in more than Rs 10 lakh per year attracted a dividends distribution tax of 10%.

Taxation of Capital Gains Offered by Mutual Funds

The tax rate of capital gains of funds depends on the holding period and kind of mutual fund. The holding period is the duration that the open-end investment company units were held by an investor. In simple words, the holding period is the time between the date of the acquisition and sale of fund units. Capital profits realized on selling units of common funds are categorized as follows:

Fund type

Short-term capital gains

Long-term capital gains

Equity funds

15% + cess + surcharge

Up to Rs one lakh, a year is tax-exempt. Any gains above Rs one lakh are taxed at 10% + cess + surcharge

Debt funds

Taxed at the investor’s taxation slab rate

20% + cess + surcharge

Hybrid equity-oriented funds

15% + cess + surcharge

Up to Rs, one lakh per year is tax-exempt. Any gains above Rs 1 lakh are taxed at 10% + cess + surcharge

Hybrid debt-oriented funds

Taxed at the investor’s taxation slab rate

20%

Taxation of Capital Gains When Invested Through SIPs

Systematic investment plans (SIPs) are a way of investing in mutual funds. they’re designed in such how that investor can invest a low amount periodically in a very investment company scheme. Investors are offered the freedom to settle on the frequency of their investment. It is weekly, monthly, quarterly, bi-annually, or annually.

You purchase a specific number of open-end investment company units through every SIP installment. The redemption of those units is processed on a first-in-first-out basis. Suppose you invest in an equity fund through a SIP for one year, and you opt to redeem your entire investment after 13 months.

In this case, the units bought first through the SIP are held for the long period (over one year) and you realize long-term capital profits on these units. If the long-term capital gains are but Rs one lakh, then you don’t need to pay any tax.

Tax Benefits Of Mutual Fund Investment

However, you create short-term capital gains on the units purchased through the SIPs from the second month onwards. These gains are taxed at a flat rate of 15% regardless of your revenue enhancement slab. you may pay the applicable cess and surcharge on that.

Securities Transaction Tax (STT)

Apart from the tax on dividends and capital gains, there’s another tax called the Securities Transaction Tax (STT). An STT of 0.001% is levied by the govt (Ministry of Finance) once you attempt to buy or sell open-end fund units of an equity fund or a hybrid equity-oriented fund. There is no STT on the sale of deficit fund units.

Conclusion

The longer you hold on to your open-end fund units, the more tax-efficient they become. The tax on long-term capital gains is relatively under the tax on short-term gains.