Investing in mutual funds is a popular avenue for wealth creation, offering potential returns and diversification. However, it’s essential for investors to get through the tax on equity landscape associated with mutual funds to get potential returns effectively. This comprehensive guide explores the taxation of equity mutual funds investment online, shedding light on the intricacies of asset categorization, holding periods, and the unique advantages offered by Equity-Linked Savings Schemes (ELSS).
Understanding Asset Categorization
The tax treatment of mutual funds investment online hinges on the type of assets the fund focuses on and its categorization:
- Equity-Oriented Funds:
Funds investing over 65% of their corpus in domestic company shares fall under this category. This includes balanced funds with substantial exposure to domestic equity. Short-term returns (holding period < 12 months) incur a 15% tax, while long-term returns (holding period > 12 months) are taxed at 10% for amounts exceeding ₹1,00,000.
- Debt Funds:
Non-equity oriented funds investing in fixed-income bonds are taxed at the investor’s tax slab
- ELSS Mutual Funds:
ELSS funds, primarily invested in the stock market, stand out as tax-saving mutual funds. With a minimum lock-in period of three years, they offer tax deductions up to ₹1,50,000 under Section 80C of the Income Tax Act.
Holding Periods and Taxation
The duration of holding a mutual fund investment, known as the holding period, determines the tax rate:
- Short-Term Taxation:
Equity-oriented mutual funds held for less than 12 months incur a short-term capital returns tax of 15
- Long-Term Taxation:
Returns from equity mutual funds held for more than 12 months are subject to a 10% long-term capital returns tax if exceeding ₹1,00,000.
Tax Saving with ELSS
ELSS funds offer a unique advantage in tax planning:
- ELSS Tax Deduction:
Investors in ELSS funds may claim tax deductions up to ₹1,50,000 under Section 80C. This makes ELSS an option for those seeking tax-saving opportunities with the potential for equity-related returns.
SIP Taxation and Things to Remember
- SIP Tax Calculation:
IP taxation operates on the principle of evaluating each unit individually. The duration for which you hold these units determines whether they attract short-term or long-term capital returns tax.
Individual Unit Calculation: In a SIP, your investment gets divided into units, and each unit is considered separately for taxation purposes. This means that every unit bought at different times could have different taxation implications based on when it was purchased and how long it was held.
Holding Period Impact: The duration for which you hold these units is crucial. If you redeem or sell your units within a short period from their purchase date, usually within one year, the returns are considered short-term capital returns and are taxed at a higher rate, typically as per the individual’s income tax slab.
Conversely, if you hold these units for more than a year, the returns are categorised as long-term capital returns. Long-term capital returns on equity funds were typically tax-exempt till recent changes in tax laws, while long-term returns on debt funds were taxed at a lower rate with indexation benefits.
FIFO Rule (First-In, First-Out): The “First-In, First-Out” principle applies when you partially redeem your investments. This rule means that when you sell or redeem only a portion of your units, the units you acquired first are considered as the ones being sold first.
Conclusion
Understanding the tax on equity funds or flexi cap funds is paramount for smart tax planning. Differentiating between short-term and long-term returns, exploring tax-saving options like ELSS, and being mindful of additional taxes like dividend taxation and STT are essential steps. Despite taxation, mutual funds remain potent vehicles for wealth creation, especially when held for the long term. By incorporating tax considerations into their investment strategy, investors may understand their potential returns and work towards achieving their financial goals.
Disclaimer: Mutual fund investments are subject to market risks, read all scheme related documents carefully.
