Income tax rules on mutual fund gains explained

Let us discuss in detail the taxation rules for all the three categories of mutual funds.

Equity Oriented Schemes

The first and foremost category are equity-oriented schemes. an equity oriented mutual fund The scheme predominantly invests in companies listed on Indian exchanges. As per income tax laws, an equity mutual fund scheme is a scheme that invests at least 65% of the scheme’s assets in equity and equity-related instruments of listed companies in India. In case of Fund of Funds (FoF), the FoF has to invest a minimum of 90% of the scheme’s assets in a fund which, in turn, invests 90% of its assets in Indian listed equities to qualify as equity. does. -oriented planning.

Any equity-oriented investment becomes long term if held for more than 12 months. Long-term capital gains are taxed at a flat rate of 10% after initial 1 lakh inclusive of long-term capital gains of listed shares and equity-oriented schemes. The initial Rs 1 lakh of such long-term capital gains are taxed at zero rate, making them effectively tax-free. No indexation benefit is available while computing taxable long-term capital gains for equity-oriented schemes.

For investments in equity schemes made before February 1, 2018, the NAV (Net Asset Value) of the scheme as on January 31, 2018 is to be taken as the cost for computing long-term capital gains. You cannot avail any exemption under section 87A against tax liability in respect of tax on long-term capital gains, which can be availed against tax liability in respect of any other income.

Profits made on equity-oriented schemes held for less than 12 months are treated as short-term capital gains and taxed at a flat rate of 15%. Taxpayers are not eligible to claim any deduction under Chapter VIA against capital gains on predominantly equity oriented schemes under sections 80C, 80CCD, 80D, 80G, 80TTA, and 80TTB.

Schemes where investment in Indian equity does not exceed 35% of the corpus

This is a new category introduced and includes all schemes where the investment in Indian companies does not exceed 35%. This includes debt-focused mutual fund schemes, Gold/Silver Schemes, Schemes of Foreign Mutual Funds as well as Schemes of Indian Mutual Funds investing in shares of foreign companies directly or indirectly through feeder funds. All gains under this category of schemes, irrespective of the holding period, are treated as short-term capital gains and taxed at the slab rate applicable to you.

Schemes where investment in Indian equity is more than 35% but does not exceed 65% of the corpus

All schemes where Indian equity investment exceeding 35% but not exceeding 65%, fall under this category and investments in these schemes become long term for more than 36 months and are taxed at a flat rate of 20% after applying indexation Is. Short term capital gains under this category of schemes are treated as your regular income and taxed at the slab rate applicable to you.

All investments made up to March 31, 2023 in equity schemes where the equity investment does not exceed 65% of the corpus have been grandfathered and thus will be taxed like this category of investment.

discounts and rebates

You can claim exemption against long-term capital gains on mutual funds if you invest the sale proceeds to purchase a residential house property within the prescribed time period and subject to compliance with certain conditions. There is no exemption available in respect of short term capital gains tax under the income tax laws.

If your net taxable income (including one lakh long-term capital gains on equity products on which no tax is payable) does not exceed Rs 5 lakh and you opt for the old tax regime, you are eligible to claim tax exemption. Eligible up to Rs. 12,500/- under section 87A against all your tax liabilities except long-term capital gains on equity-oriented schemes and listed shares. However, if you move to a new tax regime, you can avail tax exemptions 25,000/- provided your total taxable income does not exceed 7 lakhs. even if it exceeds 7 lakhs, the tax payable shall not exceed the amount of income which exceeds 7 lakhs.

In the case of resident taxpayers, the taxpayer is entitled to set off any shortfall of regular income to the extent of basic exemption against long-term capital gains of any nature and short-term capital gains on equity products, whereas a non-resident has full tax on such income. to pay tax.

Balwant Jain is a tax and investment expert and can be reached at @jainbalwant