Income-tax on Long term gains made from mutual fund investments was introduced in the budget last year. It is very important to know how your mutual fund gains are taxed and report correct numbers in your returns.
3 Factors that determine the Mutual Fund Taxation
- Your Residential Status-Resident or Non-Resident (NRI)
- Types of Funds-Equity Funds or Non-Equity Funds
Any fund which invests 65% or more in equity is called as Equity Fund. For example, large-cap funds, multi-cap funds, small and mid-cap funds or equity-oriented balanced funds (where the equity exposure is 65% or more) are all called equity-oriented funds.
If the equity portion is less than that, then they are all treated as debt funds or non-equity funds. For example liquid funds, ultra-short term funds, short-term funds, income funds, gilt funds, debt-oriented balanced funds, gold funds, fund of funds or money market funds.
- Holding periods of Investment–
The holding period for Equity and Debt Funds will be different for taxation purpose.
|STCG||If the holding period is less than or equal to 12 months||If the holding period is less than or equal to 36 months|
|LTCG||If the holding period is more than 12 months||If the holding period is more than 36 months.|
Mutual Fund Taxation FY 2018-19 -Capital Gain Tax Rates
Now that you have clarity on what is Short term capital gains (STCG) and Long term Capital gains (LTCG). Let us move further and understand the Capital Gain Taxation for mutual fund investors.
The biggest change from FY 2018-19 is the introduction of LTCG in Budget 2018. The table below will give you a brief of the same:
Note: Surcharge @ 15%, is applicable where the income of Individual/HUF unit holders exceeds Rs. 1 crore. Also, surcharge @10% to be levied in case of individual/ HUF unitholders where the income of such unitholders exceeds Rs.50 lakhs but does not exceed Rs.1 Cr. Further, Health and Education Cess @ 4% will continue to apply on the aggregate of tax and surcharge.
Where an individual/HUF total income (income from all sources) is less than the slab rate, then any income from long term or short term is a part of the slab rates.
Short Term Capital Gains on Equity Mutual funds/Equity Shares
|Cost price of MF (10,000*100)||1 January 2018||10,00,000|
|Selling price (10,000*120)||31 March 2018||12,00,000|
|Tax payable (15%)||30,000|
Note: There is no change in the STCG with the new amendment. STCG remains taxable as it always was. It is to be computed based on the equity or debt fund. There is no impact of 31 January 2018, cut off dates prices for STCG.
Long term Capital Gains on Equity Mutual funds
There is a cut-off date of 31 January 2018, which has been introduced for the purpose of computing LTCG. LTCG is to be computed in 2 parts:
- Units purchased on or before 31 January 2018
- Units purchased post 31 January 2018
Gains up to Rs. 1,00,000 is exempt while computing LTCG from equity-oriented mutual funds or shares.
Long term Capital gains on mutual funds purchased before 31 January 2018 and sold after 12 months.
There was a benefit introduced to investors by considering the cost on 31 January 2018 for the purpose of computing LTCG. However, this method can be a bit confusing so you may take expert advice. We have described the same below for your understanding:
The Cost to be considered :
Higher of Actual cost or (the formula amount)
The Formula Amount is Lower of
- The highest price of the unit on 31 January 2018 from all recognized stock exchange.
- Actual Selling Price
Date of buying – 1 April 2017
Date of selling – 31 April 2018
Number of Units – 10,000
Price of MF on following Dates
|1||Date of buying (1 April 2017) – Actual Cost||100|
|2||31 January 2018 (highest price on cut-off date)||150|
|3||Date of selling ( 30 April 2018)||120|
Step 1 – Calculate the Formula Amount i.e. Lower of (2) and (3) i.e. 120 (lower of 150 or 120)
Step 2 – Calculate the cost to be considered i.e. higher of (1) or Step 1 answer – 120 (higher of 100 0r 120)
|Cost price of MF (10,000*120)||12,00,000|
|Selling price (10,000*120)||12,00,000|
Things to Note:
- Comparison of prices on 31 January 2018 is done to compute the considered cost price.
- The highest price of the MF/share as on 31 January 2018 is to be considered for this calculation.
- Final selling price is the lower of 31 January price or the price on the selling date.
- Hence, this cost determination method may lead to nil gains, benefitting the investor.
- The gains will not be Nil in all the cases.
- This method will never lead to a long term capital loss for an individual/HUF.
Long term Capital Gains on mutual funds purchased after1 February 2018
No comparison of prices as on 31 January is required. However, the exemption limit of Rs. 1,00,000 is available.
|Cost price of MF (10,000*100)||1 February 2018||10,00,000|
|Selling price (10,000*120)||10 February 2019||12,00,000|
TAX – Savings Equity Mutual Funds
Equity Linked Savings Schemes or tax saving mutual funds are one of the most sort out for financial products under section 80 C of the Income-tax Act, 1961.
ELSS comes up with a lock-in period of 3 years. It means that once you invest in ELSS, you cannot redeem your units before the expiration of 3 years. You can claim a tax deduction of up to Rs 1.5 lakhs and save taxes up to Rs 45,000 by investing in ELSS.
Upon redemption after 3 years, the long-term capital gains (LTCG) up to Rs 1 lakh are tax-free in your hands. LTCG in excess of Rs 1 lakh is taxed at the rate of 10% without the benefit.
You can read about various ways to save taxes under section 80 C in out Article - How to save tax?
Note: It is not compulsory to redeem ELSS mutual funds after 3 years. You can stay invested for a longer duration. To maintain the 80C benefit, you must stay invested for 3 years.
Mutual Fund Taxation FY 2018-19 – Dividend Distribution Tax (DDT)
There are few investors who opt for dividend option in mutual funds. Hence, let us see the taxation on the dividend of such funds. Earlier there was no DDT for equity investors. However, from the Budget 2018, DDT @10% will be applicable to equity investors also.
|Base Tax Rate||Surcharge and Cess||Total Tax|
|Equity Oriented Schemes||Nil||Nil||Nil|
|Debt Oriented Schemes||Nil||Nil||Nil|
Tax Payable by Mutual Fund Companies
|Equity Oriented Schemes||10%||12% SC + 4% cess||11.648%|
|Money Market/Liquid Schemes/debt funds||25%||12% SC + 4% cess||29.12%|
|Infrastructure Debt Fund||25%||12% SC + 4% cess||29.12%|
Note: In spite of the 10% long term tax now payable on mutual fund investments. It is a very good form of investments and the gains made are far more to compensate the taxes to be payable on the Long term. However, it is advisable to get your returns working reviewed by an expert where you have a lot of equity/ mutual funds gains in a particular FY.