Advice on managing mutual fund income tax



Income from mutual funds can be classified into two categories: dividends and appreciation when realized are taxed as capital gains. Mutual funds can be divided into two categories for tax purposes. In the first category, all equity-oriented regimes fall and the other regimes fall into the second category.

Any mutual fund system that keeps a minimum of 65% of its corpus invested in Indian companies listed in India falls under equity-based regimes. Likewise, any fund that invests at least 90% of its corpus in an ETF which in turn invests at least 90% of its corpus in these companies is also treated as an equity-focused program. One of the popular schemes among ELSS taxpayers eligible for the Article 80C deduction falls into this category. By this definition, all aggressive hybrid funds that maintain their minimum 65% investment in such companies are treated as equity-based programs. All other plans such as conservative hybrid plans, debt funds, gold ETFs, gold funds and international funds fall into the second category.

Tax rate and holding period for capital gains

Any profit made on an equity-based scheme sold / redeemed after 12 months is treated as long-term capital gain and taxed at the flat rate of 10% after initial exemption of one lakh without indexation. Profits from these schemes made within 12 months are treated as short-term capital gains and are taxed at the flat rate of 15%.

In the event that investments in such plans were made before January 31, 2018, the benefits accrued until January 31, 2018 are protected and the net asset value as at January 31, 2018 should be considered as your cost for the calculation of the surplus. long-term values.

For the second category, profits are treated as long-term capital gains in the event of sale / redemption after 36 months. Long-term capital gains are taxed at 20% after application of indexation to your acquisition cost. All profits made before 36 months are treated as short-term capital gains and are added to your regular income and taxed at the slab rate applicable to you.

Compensation for capital losses on UCITS

All short-term capital gains and long-term capital gains are aggregated separately. Short-term loss can be adjusted against long-term gains, but long-term loss cannot be adjusted against short-term gains. Capital gains loss cannot be adjusted against income under any other title. Any unadjusted capital loss during the current year can be carried over to the following 8 years to be offset in subsequent years.

How Mutual Fund Dividends Are Taxed

Dividends are taxed as your regular income as part of the main income from other sources. The mutual fund house levies a 10% tax on dividends, in case the total dividends are likely to exceed five thousand per year for all plans in the same fund house. If you borrowed to invest in mutual funds, you can deduct interest up to 20% of the total amount of dividends on that income.

Tax rules for non-residents

There is no difference between resident and non-resident for the criteria of holding period and the tax rates applicable to capital gains, but the OPC deducts the TDS at the time of redemption on the amount of the capital gains. -values. No TDS is required for resident taxpayers.

Non-residents do not benefit from the basic exemption for all long-term capital gains and short-term capital gains on equity and they must pay the full flat-rate tax on these capital gains if their income includes only this capital. wins. Likewise, non-residents are not entitled to reimbursement under Section 87A up to Rs. 12,500 / -. This rebate is tax available to a resident taxpayer with income up to five lakhs against tax of any kind with the exception of long-term capital gains tax on equity regimes. .

Tips for Managing Mutual Fund Tax

Since long-term capital gains on equity are exempt up to one lakh each year, you can consider reserving at least 1 lakh of long-term capital gain on equity programs for each member. of your family. Even if you want to continue with the same program, you can redeem and purchase the same program on the same day with the same NAV and you only have to pay a small amount as STT and stamp duty.

Also, for those whose taxable income does not exceed five lakhs per year, they can plan their capital gains so that they can get non-taxable capital gains as part of the tax cut of Rs. 12,500 / – under section 87A. Please note that this Section 87A rebate is not available for long term capital gains on equity plans.

If you are planning to buy a residential home and you do not own more than one home, you can plan your long-term capital gains so that you qualify for a section 54F exemption for long-term capital gains on your mutual fund investments. in case you are sitting on huge long term unrealized capital gains.

No tax deduction is available under Chapter VIA on all long-term capital gains and short-term capital gains from equity regimes. This includes various sections such as Section 80 C covering Deductions for LIP, PF, PPF, Tuition, Home Loan Repayment, ELSS etc., Section 80 CCD covering NPS, Section 80 D for Mediclaim , section 80 G for donations, etc. No in the event that you do not have sufficient income on which tax is payable at your usual slab rate, do not invest in products eligible for these deductions.

Balwant Jain is a tax and investment expert. He can be contacted at [email protected]

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