The Buyt Desk
Mutual Funds(MF) are the flavour of investment in today’s world. People are slowly seeing the wide gap in return from the traditional investment avenues such as plain vanilla bank fixed deposit and mutual funds. If you invest in MF for a longer time horizon of 5 years plus you may earn a return of around 10-12% on your investments which is much better than small savings schemes like the Public Provident fund, Recurring Deposit or Fixed deposits. But the gains earned on mutual fund transactions are taxed under the capital gains tax.
Two Types of Capital Gains Tax
Long Term Capital Gain or Short Term Capital Gains Tax – it will depend on how long you have held the mutual fund units and in how much time have you redeemed it. If it is an equity-oriented mutual fund then to save more tax you need to hold it for at least a year. The units sold after a year will attract long term capital gains tax of 10%. The gains of up to Rs 1 Lakh is exempted from tax but the gains above Rs 1 lakh will be taxed at 10%. If the investor redeems the MF units within a year then short term capital gain tax at the rate of 15% will have to be paid by him/her. But the tax rate changes with the type of mutual fund category. A debt-oriented MF is taxed differently. For debt, the MF scheme holding period is 3 years. If the units are redeemed within the 3 years it will attract short term capital gains tax. The short term gains from Debt Mutual funds will be added to the investor’s income and he/she will be taxed as per their income tax slab. On the other hand, if the Debt Mutual Fund is redeemed after 3 years then a tax of 20% with indexation benefit will be calculated on your gains.
Switching Of Mutual Funds
You may not want to invest a lump sum amount in one go in a mutual fund scheme. This is when the Systematic Transfer Plan (STP) comes to your rescue. An STP enables the transfer of money from one scheme to another. Let’s say you park your lump sum in Scheme A which could be a debt fund or a liquid fund and decide to STP your money to Scheme B gradually. You may think that you are not earning any gains in this process as no money comes to your account. But remember that for money to be transferred to scheme B the units are getting redeemed and re-invested. You are reinvesting your money and whenever there is redemption for reinvesting, every time gain or loss will be considered. You will have to either take a consolidated transaction statement from your Mutual Fund company or pay Capital Gains Tax by taking a statement of gains from the Registrar and Transfer Agent of the company i.e. RTA which can be CAMS or Karvy. If money is transferred by withdrawal from the debt scheme, then taxation of the debt scheme will be applicable and if money is withdrawn from the equity scheme then tax rules of equity will be applicable.
Dividend Income
According to the new rules of income tax, now whenever investors get a dividend, it will be added to their income. And tax will have to be paid according to the tax slab. Earlier companies used to pay dividend distribution tax on dividends. But now it will be added to the total income of the investors. In the budget presented on February 1, 2020, Finance Minister Nirmala Sitharaman had removed the Dividend Distribution Tax. If you earn Rs 5000 through dividends, then TDS will not be deducted. But on dividend income above Rs 5000, TDS will have to be paid at the rate of 10%.If the investor has not shared PAN information or your PAN is not linked with Aadhaar, then 20 per cent TDS will be levied on it.
