The money you invest in a mutual fund generates capital gains that are taxable. Hence, mutual fund investing is entirely a goal-oriented process. The main purpose of investing in a mutual fund is to maximize your wealth in the form of capital gains, dividends, or interest. The period for which the investor holds his investments or the investor stays invested is called the holding period. This holding period determines the tax implications that will be imposed on your investments.
The tax applicable to your investment may determine your loss or capital gain while taxation on short-term investment is just like any other funds that are invested for less than three years. Whether you invest for long-term or short-term needs, you need to know about capital gain on mutual fund and taxation of mutual funds.
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Mutual Fund taxation
The taxation on mutual funds is determined by the duration for which the investor holds his investment. Also, referred to as the holding period, it is an important factor that decides tax implications on your investment. To know more about taxation, go through the details mentioned below.
Tax saving funds
ELSS funds come under the definition of Section 80C Income Tax Act, 1961, So, these equity schemes are tax saving. However, ELSS funds come with a closed lock-in period of 3 years. During redemption, if your invested amount is more than 1 Lakh, then 10% LTGC will be imposed without indexation. But if your investment amount is less than or equal to 1lakh, then you do not need to pay any tax.
Securities Transaction Tax or STT
The Ministry of Finance India imposes securities transaction tax of 0.001% if you decide to sell your share of an equity fund or a balanced fund. However, no STT is applicable on the sale of debt mutual funds.
Debt mutual funds
The long term capital gain on mutual fund earned on debt mutual funds are taxable at the rate of 20% after-tax indexation. If you add short-term capital gains from debt mutual fund to your overall income, then you will be subject to short capital gain tax as per the income tax slab.
Balanced Mutual funds
Balanced funds are hybrid funds that invest the 65% asset in the equities. The tax implication of a balanced fund is the same as a non-tax saving fund. Likewise, if your investment amount is above 1 Lakh at the time of redemption, then you will be taxed at the rate of 10% without any indication of benefit.
SIP or systematic investment plan
An investor can invest a fixed amount in a weekly, monthly or yearly basis through the SIP plan. Taxation on SIPs is determined by the holding period. In case you want to change your investment plan of SIP, then you have to make a new investment plan which will attract tax charges separately. Besides, if you’re going to withdraw the whole invest amount along with gains, the total amount will be subject to taxation. The gains will be taxed under short-term capital gains if the fund is invested for less than a year.
The more your holding period on a mutual fund, the more they become tax efficient. The tax imposed on long-term funds is lower compared to other short-term investment funds. These points, as mentioned above, may help you know more about capital gain on mutual fund.