Tax on mutual funds

How to calculate tax on mutual funds transactions

Mutual fund is useful way for saving and generation of income. If you are investing, you like to know rules for tax on mutual funds.

Tax on mutual funds:

We can divide mutual fund in two categories:

  1. Equity oriented mutual fund
  2. Non equity oriented mutual fund

we can also divide capital gain in two categories:

  1. Short term capital gains
  2. Long term capital gains

Short term capital gains:

When units of mutual fund is held for less than 1 year, capital gain arising from sale of mutual fund unit is short term capital gains.

Long term capital gains:

When units of mutual fund is held for more than 1 year, capital gain arising is long term capital gains.

 

Tax on Equity oriented mutual fund:

Dividend Income:

Dividend received is exempt from tax u/s 10 (35) (a).

Short term capital gain:

Capital gain tax rate is 15% if following conditions are satisfied:

  1. Redemption with stock exchange or AMC
  2. STT is paid

For case other than mentioned above, tax rate is as per income tax slab applicable to person.

Long term capital gain:

Long term capital gain from equity oriented mutual  fund is exempt from tax u/s 10 (38).

Tax on Non equity oriented mutual fund:

Dividend income:

Dividend income is exempt but dividend distribution tax is deducted by AMC. Read our post on dividend distribution tax to know calculation of ddt.

Short term capital gain:

Short term capital gain is taxable as per tax slab applicable to person.

Long term capital gain:

Long term capital gain from non equity oriented mutual fund is taxable at 10% without indexation benefit and at 20% with indexation benefit. Indexation benefit means you can improve cost of acquisition and cost of improvement as per inflation. You can download indexation table from here

Mutual fund Period of holding Capital gain Tax
Equity fund Less than 12 months Short 15%
Equity fund 12 months or more than Long Exempt
Non equity fund Less than 12 months Short Tax as per tax slab
Non equity fund 12 months or more Long 10% without indexation or 20% with indexation

 

Tax saving on sale of mutual funds:

  1.  To save capital gains, it is better to sale mutual funds unit after one year and invest in equity oriented mutual fund. Because by this, you can avail full exemption u/s 10 (38) from tax.
  2. Choose 10% or 20% rate for long term capital gain properly. It is better to calculate long term capital gain with indexation and without indexation. Choose option which generates less tax.
  3. For non equity funds, tax rate is applicable as per slab of income tax. If you have lower tax slab, it is beneficial else you have to pay higher tax. So if you are in higher tax slab like 30%, you can sell units after one year because long term capital gain tax rate is applicable here and rate of it is 20% (with indexation.)
  4. Claim exemption u/s 54F or 54EC if gain is long term.

How to file return and show capital gain?

You can get statement from mutual fund house and examine the data about capital gain. But sometimes some funds are not giving statements and it increases difficulty of unit holders. However you can get help of Karvy.

Capital gain calculation:

Capital gain = Sell value of units less indexed value / value of units of mutual funds less brokerage.

Tax shall be levied as per tax rate (short term capital gain or long term capital gain)

Which form is applicable for income tax return filling?

ITR 2 is applicable here. You can download it from our site.

Advance tax on capital gain:

Don’t forget to pay advance tax if you have capital gains during the year.

Advance tax table for individual

Capital gain realized Advance tax % of total tax Last date
On or before 15 September 30% 15 september
On or before 15 December 60% 15 December
On or before 15 March 100% 15 March

Conclusion:

Calculating and filling return for capital gain is bit confusing specially if you are busy in your business and have no time to gather information. It requires exact knowledge of finance and tax on mutual funds. What is your experience while filling return for capital gain transactions? Let me know via comments.