Taxation on Income from Equity and Debt Mutual Fund

Taxation on Income from Equity and Debt Mutual Fund Under section 10(35) of the Income Tax Act, 1961

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www.carajput.com; taxation on mutual fund

1.Equity Mutual Fund

The equity mutual fund is a kind of mutual fund scheme in which a substantial proportion of the assets under administration is primarily invested in stocks including the equity stock market. They come under the class of “Stock Mutual Funds” which is defined as funds with at least 65% of the portfolio is invested in equity and equity-related securities. Every mutual fund is known as equity mutual funds or stock mutual funds, including equity mutual funds, balanced funds, sectoral funds, large-cap funds, mid-cap funds, and small-cap funds, etc.

www.carajput.com; Equity mutual fund

www.carajput.com; Equity mutual fund

A.Chargeability of DDT(Dividend Distribution Tax)

In the hands of the investor, and distribution of income on equity mutual funds is totally tax-free. In addition, no dividend distribution tax is imposed on equity mutual funds, which means the house of the mutual fund is also not liable to deduct the dividend tax declared on an equity mutual fund scheme.

Note: DDT is the abbreviation for ‘Dividend Distribution Tax’ which refers to the tax deducted or charged by the fund house (mutual fund company), on any divided declared and distributed to its investors.

B. Calculation of capital gains on Equity mutual Fund?

Capital gains generated from the selling of equity mutual funds would only be liable to capital gains tax if the retention period has been longer than one year. Equity Mutual Funds are excluded from paying long-term capital gains tax, meaning you would not be allowed to pay any capital gains tax on those transactions if you sell your equity mutual fund after 1 year of holding.

Under section 10(38) of the Income Tax Act, equity mutual funds are excluded from paying long-term capital gains tax, which ensures that if you sell your investment in equity mutual funds after 12 months of holding, you are not allowed to pay any capital gains tax on those transactions.

C. Calculation of Tax Liability of Equity Mutual funds

Based on whether the gain on sale is known as short-term or long-term capital gains, equity mutual funds are subject to capital gains tax. Tax rates on capital gains are the same for both resident Indians and non-resident Indians.

There is no dividend distribution tax on the payment of dividend income into equity mutual funds, unlike debt mutual funds. 

Type of Tax Tax rate
Short Term Capital Gains Tax (under section 111A)
Resident Indian 15%
Non-Resident Indian 15%
Long Term Capital Gains Tax ( under section 112 (A)]
Resident Indian 10% ( Capital gains exceeding ₹ 1 Lakh)
Non-Resident Indian 10%( Capital gains exceeding ₹ 1 Lakh)
Dividend Distribution Tax Nil (as per section 115R)

2. Debt Mutual Fund

The debt mutual fund is a kind of mutual fund scheme in which a substantial proportion of the assets under administration are invested mainly in fixed income instruments, including bonds and debentures. They come under the ‘Non-Equity Mutual Funds’ group, which is classified as funds with less than 65% of their portfolio invested in equity and equity instruments. All mutual funds, including debt mutual funds, gold funds, money market funds, balanced funds, etc. are Classified as non-equity mutual funds.

www.carajput.com; Debt mutual fund

www.carajput.com; Debt mutual fund

A. Chargeability of Dividend Distribution Tax

For individuals and HUF investors, the allocation of income on debt mutual funds is subject to a dividend distribution tax at the rate of 28.33 percent (including surcharge and cessation). Asset management companies subtract DDT from the dividend in the debt mutual fund holder’s portfolio prior to crediting the dividend.

B. Calculation of capital gains on Equity mutual Fund?

Capital gains generated from the selling of Debt mutual funds incur capital gains tax. Depending on the retention time, the sale may incur short term capital gain tax or long term capital gain tax.

Long-term capital gains- If, after 3 years of holding time, you sell your investment in a debt mutual fund, capital gains resulting from that sale are known as a long-term capital gain (LTCG) and will be charged at the tax rate on long-term capital gains. Long term capital gains are eligible for an indexation advantage in which the cost of purchasing an asset over the retention period is adjusted for variations in the cost inflation index. In the event of an increase in the index, the purchase rate is changed upwards, thus decreasing the value of the capital gain and, thus, the tax on capital gains. The price indexes used for the adjustment are maintained and issued by the Department of Income Tax.

Short-term capital gains- If you sell your investment in less than 36 months (3 years) in a debt mutual fund, the capital gains resulting from the sale are known as a short-term capital gain (STCG) and are charged at the tax rate on short-term capital gains.

C. Calculation of Tax Liability on Debt mutual Fund?

For debt mutual funds, there are two types of taxes applied:

  • capital gains tax Based on which the gain on sale is classified as short-term or long-term capital gains, For resident Indians and non-resident Indians, capital gains tax rates are different.
  • Dividend Revenue or dividend tax reported on the debt investment mutual fund
Type of Tax Tax rate
Short Term Capital Gains Tax
Resident Indian As per individual’s income tax bracket
Non-Resident Indian As per individual’s income tax bracket
Long Term Capital Gains Tax (under section 112)
Resident Indian 20% (with indexation benefit)
Non-Resident Indian On listed funds- 20% (with indexation benefit) On unlisted funds- 10% (without indexation benefit)
Dividend Distribution Tax (DDT) At the rate of 28.84% (including surcharge and cess) for individuals and HUF(under section 115R)

Regards

Rajput Jain & Associates

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