I sold some mutual fund units at a profit after one year of purchase. How will this income be treated for tax purposes? Also, is the dividend received from mutual funds taxable? How is this tax to be paid?
— Anand, Chennai and Hemant Gupta, Mumbai
The tax on income from mutual funds depends on the kind of mutual fund you invested in. Mutual funds with more than 65% of their corpus invested in equities are categorised as equity mutual funds. The tax on income from these funds is lower than that applicable on income from debt funds or monthly income plans (MIPs) which have a small 10-20% exposure to equities.
Suppose a person invests in an equity fund and redeems the investment at a profit. This is how the profits will be taxed:
If the investment was in a debt fund or an MIP, the tax on the Rs 1,000 profit would be as follows if redeemed within a year:
| Tax (at 10% if taxable income up to Rs 1.5 lakh a year) | Rs 100 |
| Tax (at 20% if taxable income up to Rs 2.5 lakh a year) | Rs 200 |
| Tax (at 30% if taxable income of over Rs 2.5 lakh a year) | Rs 300 |
| If redeemed after a year, the tax would be 10% of profit | Rs 100 |
Dividend received from any mutual fund is tax free. But there is a dividend distribution tax (DDT) on debt funds and MIPs. This DDT reduces the amount of money coming to the investor. So the dividend received is actually coming to the investor after a tax deduction at source.
It is important to note that whether this income is taxable or not, it will have to be declared in the new income tax form you would use to file your tax return this year. There is a separate section in the forms for capital gains.
Your mutual fund will not deduct any tax except STT (securities transaction tax, which is payable on all transactions made through a recognised exchange) and the DDT. The onus of paying the tax on your profits is entirely on you.
