Today, investing in the stock market has become quite easy and there are sectors available for every type of investment, like if you want to invest in mutual funds or want to invest in the stock market or want to do trading or want to invest in any other type of funds, then there are sectors available today.
When you make profits on investments, the first question that comes to your mind is whether it will be taxed? And if yes, then at what rate? When you make profits from mutual funds, the most important thing is how tax will be applicable on it.
Mutual funds are one of the best investment tools in today’s time. It is capable of giving you a good return which helps you achieve your financial goals even with a small amount of investment. But here it is also important to note that like other investment tools, mutual funds are also not tax-free, and if you are investing without knowing about the tax levied on mutual funds, then you do not fall in the category of an informed investor.
What are Mutual Funds?
A mutual fund is an investment vehicle that pools money from many investors and invests it in a mix of assets such as stocks, bonds, government securities and even gold. Mutual funds allow investors to diversify and professionally manage their portfolio, with returns and risks depending on the fund’s investment performance.
There are many types of mutual funds, and they can be classified based on their structure, investment objective, and asset allocation. Professional fund managers oversee mutual funds and make investment decisions on behalf of investors. Mutual funds are a popular investment option for both individuals and institutions.
What are the tax Rates on Mutual Fund Capital Gains?
As per the tax laws in India, any mutual fund that has more than 65 percent of its investments in Indian stocks is called an “equity fund”.
If you sell your equity fund within 12 months, it attracts short-term capital gains tax at the rate of 15%. If you hold it for more than 12 months, it attracts long-term capital gains tax at the rate of 10%.
Paying Taxes on Long Term Capital Gains
Under the tax rules, long-term capital gains are exempted up to ₹1 lakh, which means that the first ₹1 lakh of profit will not be taxed.
For example, if a person makes a long-term profit of ₹2.5 lakh from an equity fund, he will have to pay tax at the rate of 10% on only ₹1.5 lakh of profit. This means he will have to pay a tax of ₹15,000 (excluding cess and surcharge).
Factors that Decide Tax on Mutual Funds
Mutual funds generate two types of income, capital gains and dividends, and both fall under tax brackets. The percentage of tax rate depends on many factors such as the type of mutual fund scheme in which the investment is made, the holding period, the tax bracket in which the investor’s income falls, etc. If we want to fully explain the tax on mutual funds, then let us first know about the facts on which the tax calculation depends.
Dividend: The securities or assets in which mutual funds invest usually distribute a part to the investors in the form of profit shares. This profit share is called dividend. Dividends do a good job of giving the investor a regular source of income as well as partial income.
Capital Gains: The increase in the value of an investment as its holding period increases is called capital gains. When an investor sells his mutual fund unit, the tax levied on the profit earned from it is called capital gains tax.
Holding period: The tax levied on any investment also depends on its holding period i.e. for how long it has been invested in a fund.
Types of funds: Mutual funds invest in mainly two types of securities. Equity and debt. Equity invests in shares and private sector assets which have high risk and high returns. Debt mutual funds invest in government securities, bonds and fixed income securities which have low risk and low returns. Apart from this, there are many other types of fund schemes such as hybrid and tax saving schemes. The tax rates and conditions of all these are different.
What are the tax rules on Debt Funds?
Earlier, tax rates on debt funds were beneficial. But since Budget 2023, these funds are taxed as per your marginal tax rate. This means that if you fall in a higher tax slab, debt funds may be less beneficial for you.
What will be the tax if I make a loss?
If you make a loss from equity funds, it can be carried forward to future years and adjusted against the next profits. As a general rule, long-term capital gains can be set off against long-term capital losses, while short-term capital gains can be set off against both short-term and long-term gains.
Conclusion
There is tax on profits earned from investing in mutual funds, but the tax rules are quite simple. Hopefully, from this post you have got useful information regarding What are the tax rates on mutual fund. If you have any question regarding this post, then you can tell us by commenting in the comment box given below. Your feedback and suggestions are welcome as always. Thank you.
