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How does taxation work for mutual fund investments?

1) Equity Funds

  1. Equity funds essentially mean any fund which has more than 65% invested in equity . For example, large-cap funds, small-cap funds, balanced funds(equity-oriented), etc.
  2. Short Term Capital Gains (STCG) of 15% will be applicable if the units are sold within 1 year of allotment.
  3. Long-Term Capital Gains (LTCG) will be 10% if the units are sold after 1 year of allotment (if your capital gains are more than 1 lac a year) - This is grandfathered till 31 Jan 2018. Meaning, whatever gains you had until 31 Jan 2018 are tax-free. Only FURTHER gains will be taxed at 10%.
  4. Dividends received in excess of Rs 10 lacs , will be chargeable at the rate of 10%.
  5. Short-term capital loss can only be offset against STCG or LTCG
  6. Long-term capital loss can only be offset against LTCG.

2) Non - Equity Funds

  1. This is funds in which the percentage of equity investments is less than 65% . ex: debt schemes, liquid schemes, etc.
  2. STCG will be applicable as per the tax bracket.
  3. LTCG will be applicable at 20% after indexation . Indexation means to adjust the cost of purchase as per the inflation index number which the government releases every year. Let's assume, you purchased a unit at Rs 100 in 2012-13 and sold the unit at Rs 150 in 2018-19. The cost inflation index is 200 for 2012-13 and 280 for 2018-19 respectively. Then the indexed cost of acquisition (100*280)/200 is Rs 140. The capital gains post indexation is Rs 150 - 140 = Rs 10 (instead of 150 - 100). So, a 20% tax on 10 is Rs 2 per unit.
  4. Dividends from non-equity schemes will be given after deducting DDT (Dividend Distribution Tax) which is 28.84%. So, it is best to choose a growth-oriented scheme in this case.
  5. Short-term capital loss can be offset against STCG or LTCG
  6. Long-term capital loss can only be offset against LTCG

In both cases, the capital loss cannot be offset against any Head of Income.

Note : The content above is in the context of taxation for retail individual investors only. This is applicable under the current taxation rules and could be subject to changes. Do consult a chartered accountant (CA) before filing your returns.