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Tax liability of a mutual fund investor


The type of taxes and their rates  applicable on the profits earned on investments in  mutual funds depends on the type of mutual fund scheme.

An equity-oriented mutual fund scheme is one where at least 65% of the assets are invested in equity shares of companies.

A debt-oriented mutual fund scheme is one which invests primarily in debt and money market instruments and the equity exposure is less than 65 %. Examples of debt-oriented mutual funds are money market mutual funds, liquid schemes, bond funds and income funds.

Securities Transaction Tax

Equity oriented schemes – This is a tax on the transactions on the value of the fund. Purchase and sale of the MF units in stock exchange attracts a tax of 0.125% and re-purchase by the AMC is taxed at 0.25%.

Debt oriented mutual fund units are exempt from STT.

Tax on dividends/income distributed

Though dividends received by the investor are tax free, the schemes pay tax on the dividends distributed at the following rates

Money Market Mutual Funds/Liquid Schemes – 25 % + Edu. cess and surcharge.

Other debt schemes – 12.5 % + Edu. cess and surcharge.

This tax is commonly known as dividend distribution tax. Dividends by equity-oriented mutual funds are tax free in the hands of the investor and the schemes too is not liable to pay tax.

Capital Gains tax

Capital gains are the difference between the sale price and the purchase price of the mutual fund units i.e the profits. If the units have been held for more than a year before sale, the gains are called Long term capital gains and if they are sold within 1 year from purchase, the gains are called short term capital gains.

Mutual fund investors have to pay a tax on the profits booked as follows-

Equity oriented schemes – Long term capital gains is NIL. 15 % + Edu. cess and surcharge is payable on short term capital gains.

Debt oriented schemes – Short term gains of the investor are added to his income and taxed as per the slab applicable to the investor. Long term capital gains is charged at the lower of –

10 % plus surcharge and edu.cess without indexation OR 20 % plus surcharge and edu. cess with indexation.

Tax deducted at source (TDS)

Dividends distributed and profits earned on mutual funds do not attract any TDS.

 

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