Mutual Fund Taxation Rules FY 2017-2018 & AY 2018-2019

By | January 18, 2018

Is mutual fund investment tax free? Which mutual funds are eligible for 80C tax exemption? These are few of the questions mostly people want to know when they start planning for income tax. In this article I am going to share the complete details about Mutual Fund Taxation Rules FY 2017-2018 & AY 2018-2019 with the capital gain tax rates.

Although we have to keep an eye on upcoming Budget 2018 where mutual fund taxation rules may change or may not. But so far the rule is very simple and unchanged from long time.

Capital gain tax is the term that is going to introduce with the income you are making from mutual fund investments. There are various types of mutual funds in the market and accordingly your income tax liability will be calculated. Let’s try to understand how are you taxed on mutual funds.

Short Term Capital Gain (STCG) or a Long Term Capital Gain (LTCG)

As the terms are suggesting here, these taxes are applicable on your selling of mutual fund holdings. So, how are mutual funds taxed when sold?

If you sell your mutual funds within 1 year then the tax you are going to pay will be short term capital gain and if you hold your investment for more than 3 years and then redeem mutual funds, it will be called long term capital gain tax. I will discuss more about the same in later part of this article.

Is mutual fund income tax free?

To find the answer of this question, we have to understand various factors first which will decide your tax liabilities on your mutual fund investments.

Factors Deciding Mutual Fund Taxation Rules

As I said, there is not straightforward income tax rules applied on your mutual fund investment, rather it will depend up on various other factors. Here are the 3 key factors which will decide how much tax you have to pay on your mutual fund investment return.

#1. Resident Status – Indian / NRI [Non-Resident Indian]

The first criteria is your resident status in India. If you are Indian then your tax calculation will be different and if you are NRI then it will be different. Again the difference will be how the Short Term Capital Gain (STCG) or a Long Term Capital Gain (LTCG) is calculated.

#2. Types of Mutual Funds

From the previous point I am sure you have realised that there are broadly 2 types of mutual funds available in the market which will impact in your taxation rule. They are

Equity Mutual Funds – Invest min 65% of its fund to direct equity or related instruments. E.g. Large cap, Mid-cap, Balanced funds (equity oriented), Sector funds etc.

Non-Equity Funds – less than 65% of their portfolio in equities and equity related instruments. E.g. Liquid Mutual funds, Money Market funds, Gold funds, Infrastructure debt funds, Balanced funds (Debt oriented) etc.

#3. Period of Holding & Capital Gain Tax

So, I’m sure you have understood how the period of holding is going to impact the taxation calculation for mutual funds and that is also depending up on the types of funds you are choosing and whether you are residents of India or NRI.

How Capital Gain Tax Apply on Mutual Fund Investment Based on Resident Status & Year of Holding

So, when we combine all these 3 points mentioned above, we can easily create a chart like below which will simplyfy the concept of tax implications on mutual fund investment.

Mutual Fund Taxation for Residential [Indian]

In case of equity funds tax rates will as below considering

  • STCG – Units held for less than 1 year
  • LTCG – Units held for more than 1 year
Short Term Capital Gain (STCG)Long Term Capital Gain (LTCG)
15%NIL

In case of non-equity funds tax rates will as below considering. Besides that if you have invested in international mutual funds [Category Equity:International] the similar rules will apply on the same.

  • STCG – Units held for less than 3 year
  • LTCG – Units held for more than 3 year
Short Term Capital Gain (STCG)Long Term Capital Gain (LTCG)
As per Individual’s Income Tax Slab rate20% with Indexation

Mutual Fund Taxation for Non-Residential [NRI]

In case of equity funds tax rates will as below considering

  • STCG – Units held for less than 1 year
  • LTCG – Units held for more than 1 year
Short Term Capital Gain (STCG)Long Term Capital Gain (LTCG)
15%NIL

In case of non-equity funds tax rates will as below considering

  • STCG – Units held for less than 3 year
  • LTCG – Units held for more than 3 year
Short Term Capital Gain (STCG)Long Term Capital Gain (LTCG)
As per Individual’s Income Tax Slab rate20% with Indexation on listed Funds

10% without Indexation on unlisted funds

What is Listed Funds & Unlisted Funds?

Just to make it more clear, all open-end funds are unlisted as they do not trade on an exchange. Closed-end funds and ETFs are usually listed and can be traded on a stock exchange. I will talk more about them in a separate article or you can follow my YouTube channel for such useful tutorials.

What is Indexation benefit?

In simple terms, due to inflation the real value of your money or any asset is gradually decrease with time. E.g. if you have invested 1 lakh 10 years back and that become 8 lakhs in 2018, that means your gain is not directly 8 – 1 = 7 lakh. You have to consider the actual value of 1 lakh in present time and then deduct from your income.

Let’s say including inflation it will be 4 lakh. So, your capital gain is 8 – 4 = 4 lakh. This is just an example without following any formula to make you understand what is the meaning of indexation. There are accurate formulas and rules which will calculate your indexation benefit and accordingly you can consider the value for further tax calculation.

The base year for calculation of Indexation is going to be 2001. It will have an affect (mostly positive) on investments where indexation benefit is available when calculating Capital gain taxes.

Mutual Fund TDS Rules for NRIs

Generally you don’t have to pay any TDS or tax deducted at source in case you are an Indian on your mutual fund investment. Below are the TDS rate applicable on MF redemptions by NRIs for AY 2018-19.

In case of Equity funds

Short Term Capital Gain (STCG)Long Term Capital Gain (LTCG)
15%NIL

In case of non-equity funds

Short Term Capital Gain (STCG)Long Term Capital Gain (LTCG)
30%20% with Indexation on listed Funds

10% without Indexation on unlisted funds

So, make sure you are asking all necessary questions related to TDS before investing in Mutual Funds in India as an NRI.

Is mutual fund dividends tax free?

I hope you are aware about What is dividend option in mutual fund. It is like all the profits the fund is making they are rewarding the investors with some more units of fund. Now is mutual fund dividends tax free? Here are the basic rules that you should be aware.

  • Dividends on Equity Mutual Funds : For this category mutual fund, dividend is tax free for both investor as well as fund houses.
  • Dividends on Debt Funds : The dividend income received by a debt fund unit holder is also tax free. But, the mutual fund company has to pay a dividend distribution tax (DDT)before distributing this dividend income to its Unit-holders. DDT on Debt Mutual Funds is 28.84%.

So, I hope I am able to clear all your doubts related to mutual fund taxation rules. This is what I learnt and shared from my own understanding, if you find any scope of correction, feel free to write a comment and let me know.

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