Mutual fund investments carry different tax liability for the investor. While some are taxable, others are not if held over a certain period of time under the exemption for long-term capital gains. The returns are taxed under the head ‘Income from capital gains’ as mentioned under the Income Tax Act.
If you are a mutual fund investor or planning to invest in a fund, it is important to understand the tax implications, be it long-term capital gain tax (LTCG) applicable or the short term gain tax (STCG). The tax incidence would impact your earnings when you redeem your units.
“Mutual funds are redeemed on a FIFO basis – first in, first out. The units purchased first are redeemed first, and you have to pay the appropriate capital gains tax on any profit. So, for an SIP that ran from January to December, you redeem and are taxed for your January units first and your December units the last,” said Adhil Shetty, CEO, Bankbazaar.com
Shetty added further, “The taxation rules vary for debt and equity funds. For debt funds, the long-term is three years. Any debt fund units held for less than three years qualify for the Short Term Capital Gains (STCG) tax, which is as per your tax slab. Units held longer than three years qualify for the Long Term Capital Gains (LTCG) tax, which is 20.6% with indexation benefit. For equity mutual funds, the long-term is one year. Therefore any units held less than one year qualify for STCG (15.45%), and units held longer than one year qualifies for LTCG, which is tax-exempt.”