Batista Diogo Costa wants to know the tax rate applicable to income from mutual funds. Here are the tax rates that different categories of mutual funds attract.
Mutual funds are more tax efficient than most other forms of investment. The tax rate is determined by the type of mutual fund and the tenure of investment. If a mutual fund is sold within one year of investment, any profit earned is considered as short-term capital gain. If held for over a year, the profit is treated as long-term capital gain.
|What’s the tax rate of your fund?|
|Category||Short-term gains||Long-term gains|
|Equity-based balanced funds||15%||Nil|
|Funds of funds||Added to income and taxed at normal rate||10% or 20% with indexation|
|Debt-based balanced funds|
|Debt and cash funds|
|Figures are rate of tax; there is also a 3% education cess on payable tax|
Equity mutual funds offer the same tax benefits as direct investments in stocks (see table).
Equity-linked saving schemes, also known as tax plans, give investors dual benefits—tax deduction on investments and tax exemption on profits. Investments of up to Rs 1 lakh a year are deductible under Section 80C.
These funds invest in derivatives and shares to give stable returns. The best part is that as they are equity-based they attract the same tax benefits as equity funds.
The funds that have at least 65% of their corpus in equities get the same tax treatment as equity funds. So, most balanced funds keep their equity exposure above the critical level of 65%.
Funds of funds
These are schemes that invest in a basket of mutual funds picked by a fund manager. As the equity component of the portfolio is undefined, these funds do not get the benefit of lower tax as do equity funds.
Global funds that have at least 65% of their corpus invested in Indian equities are eligible for benefits given to equity funds. Otherwise, they too are taxed like debt funds.
Balanced funds (Debt-based)
In some balanced funds and monthly income plans, the equity portion is less than 65%. So they get the same treatment as debt funds.
Income from fixed deposits and bonds is clubbed with the investor’s income for the year. In comparison, the 10% tax on long-term capital gains from debt funds is significantly lower.
This is the best way to invest in gold. If held for over a year, profits are treated as long-term capital gains. Physical gold has to be held for at least three years for this benefit. Besides these, there are a few other things to keep in mind regarding taxation of mutual funds.
Tax deducted at source
Mutual funds don’t deduct tax at source. The onus of paying the tax on profits is on the investor.
Dividends received from mutual funds are tax-free. But dividends from debt-based funds have a dividend distribution tax. This can be as high as 25% of the dividend. So, if your investment tenure is more than one year, it is advisable to go in for a cumulative option and pay a 10% long-term capital gains tax instead.