“TAXATION IN

MUTUAL
FUNDS”
PRESENTATION BY:-
• VINEET BANSAL
• VAIBHAV
PORWAL
 Factors for
Securities
taxation under
mutual funds Transaction tax

Capital Gains, Deductions, TDS,

Indexation GST and Others..

Contents..
Set-off and carry
forward of losses
What are the Factors to Determine
Tax on Mutual Funds?
Taxation on mutual funds can be explained further by pointing out the factors influencing it. Here are the essential
factors that affect the taxes levied on mutual funds:
•Fund types: Taxation rules differ based on the type of mutual fund. E.g.: Equity Mutual Fund, Debt Mutual Fund,
Hybrid Mutual Fund etc.
•Dividend: A part of the profit distributed amongst investors by mutual fund houses is called dividend.
•Capital gains: When investors sell their capital assets at a higher price than its total investment amount, the profit is
termed as capital gains.
•Holding period: Time between the date of the purchase and sale of mutual fund units. As per the income tax
regulations of India, if you hold your investment for an extended period, you will be liable to pay a low tax amount.
Thus, the holding period influences the tax rate payable on your capital gains. The higher your holding period, the
lesser tax you are liable to pay.

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 CAPITAL GAINS IN
MUTUAL FUNDS ?
Mutual funds offers returns in two forms: dividends and
capital gains. Dividends are paid out of the profits of the

PI T A L company if any. When the companies are left with surplus

cash, they may decide to share the same with investors in
C A the form of dividends. Investors receive dividends

I N S proportional to the number of mutual fund units held by

GA them.

A capital gain is the profit realised by investors if the

selling price of the security held by them is greater than
the purchase price. In simple terms, capital gains are
realised due to the appreciation in the price of the mutual
fund units. Both dividends and capital gains are taxable in
the hands of investors of mutual funds
Types of Capital Gains
Capital gains are classified into two categories:

• short term capital gains

• long-term capital gains.

The taxation rate of capital gains of mutual funds depends on the holding period and type of
mutual fund. Capital gains realised on selling units of mutual funds are categorized as
follows:

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Indexation In Capital
Gains • Indexation is a systematic process that enables individuals to protect their earnings against tax erosion.
The process allows individuals to adjust the cost of investment for inflation with the help of a price
index. Indexation operates by taking into account the prevalence of inflation in the investment market.
It allows individuals to increase their cost of assets to acknowledge the impact of inflation over the
years.
• Through indexation, investors not just learn to take into account the rate of inflation; they further learn
to lower their tax liability. It will directly help investors to protect their capital gains against erosion.
When it comes to Mutual Funds, the Cost of Inflation Index plays a vital role to help index the cost of
acquisition. This makes it vital for investors to familiarize themselves with the concept of Cost of
Inflation Index.

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 Let us take an example:-
Suppose If a person Invests in Debt oriented mutual funds Amount Rs.200000 on 1 st April 2018 and wanted
to sell out in 31st march 2023 in Rs. 500000 then to calculate a exact inflation value of mutual fund that was
purchase above we use indexation table to adjust the value of mutual funds.

Calculation of Value on selling the fund ( as it is happens only in LTCG )

Formula for Calculation= purchasing value * Selling year index / purchasing year index
Taxation of Mutual Funds
Taxation of Capital Gains of Equity Funds
Equity funds are those mutual funds where more than 65% of it total fund amount is invested in
equity shares of companies. As mentioned above, you realise short-term capital gains if you
redeeming your equity fund units within a one year. These gains are taxed at a flat rate of 15%,
irrespective of your income tax bracket.
You make long-term capital gains on selling your equity fund units after holding them for over one
year. These capital gains of up to Rs 1 lakh a year are tax-exempt. Any long-term capital gains
exceeding this limit attracts LTCG tax at 10%, without indexation benefit.
Taxation of Capital Gains of Debt Funds

Debt funds are those mutual funds whose portfolio’s debt exposure is in excess of 65% and equity exposure is not more than 35%.
Starting 1st April 2023, the debt funds will no longer receive indexation benefit and deemed to be short-term capital gain. Therefore,
the gains from debt funds will now be added to your taxable income and taxed at the slab rate.
Earlier, the long-term capital gains from debt funds were taxed at 20% with indexation benefit.

Taxation of Capital Gains of Hybrid Fund

The rate of taxation of capital gains on hybrid or balanced funds is dependent on the equity exposure of the portfolio. If the equity
exposure exceeds 65%, then the fund scheme is taxed like an equity fund, if not then the rules of taxation of debt funds apply.
Therefore, it is essential to know the equity exposure of the hybrid scheme you are investing in, if not then you might be in for a nasty
surprise on redemption of your fund units. The following table summaries the rate of taxation of capital gains on mutual funds:
In the Finance Act of 2023, applicable from the financial year 2023-24, growth option of
debt funds was made taxable as short term capital gains (STCG) irrespective of holding
period. It was defined as funds with exposure to domestic equity less than 35 percent of
portfolio. This definition of domestic equity less than 35 percent of portfolio includes debt
funds, gold funds, international equity funds - basically any fund answering this criterion.

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Taxation of Capital Gains When Invested Through SIPs
Systematic investment plans (SIPs) are a method of investing in mutual funds. They are designed in such a
way that investors can invest a small amount periodically in a mutual fund scheme. Investors are offered the
liberty to choose the frequency of their investment. It can be weekly, monthly, quarterly, bi-annually, or
annually
You purchase a certain number of mutual fund units through every SIP instalment. The redemption of these
units is processed on a first-in-first-out basis. Suppose you invest in an equity fund through an SIP for one
year, and you decide to redeem your entire investment after 13 months.
In this case, the units purchased first through the SIP are held for the long-term (over one year) and you
realise long-term capital gains on these units. If the long-term capital gains are less than Rs 1 lakh, then you
don’t have to pay any tax.
However, you make short-term capital gains on the units purchased through the SIPs from the second month
onwards. These gains are taxed at a flat rate of 15% irrespective of your income tax slab. You will have to
pay the applicable cess and surcharge on it.

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 “Setting Off Capital Gains And Loss
Under Income Tax Act”
The Income Tax Act provides for taxation under various heads of income viz. salaries, income
from house property, profits & gains of business or profession, capital gains, and income from
other sources. In the normal course, one would expect that a loss in one head of income can
be adjusted (set off) against gains in another head of income, since a person is liable to pay tax
on the total income for the year. However, there are limitations to such set-off. A few key
provisions here are:
• Capital loss, short term or long term, cannot be set off against any other head of income
(e.g.,
salaries).
• Short term capital loss is to be set off against short term capital gain or long- term capital
gain.
• Long term capital loss can only be set off against long term capital gain.

Several other factors go into taxation or tax exemption. However, there are certain limits to the
setting-off in case of mutual funds. This is discussed below.

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 Securities Transaction Tax
When an investor sells units of an equity fund in the stock exchange, or offers them for re- purchase to the fund, he will
have to incur Securities Transaction Tax (STT) i.e., STT is applicable only on redemption/switch to other schemes/sale of
units of equity oriented mutual funds whether sold on stock exchange or otherwise.
STT is not applicable on purchase of units of an equity scheme. It is also not applicable to transactions in debt securities
or debt mutual fund schemes.
STT applicability for Investors in Equity oriented Mutual funds

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• Tax benefits under section-80C
Certain mutual fund schemes, known as Equity Linked Savings Schemes (ELSS) are eligible for deduction under
Section 80C of the Income Tax Act under the old tax regime. As the name suggests, this is an equity- linked
scheme, and hence the scheme invests in equity shares. The benefit is available up to Rs. 1.50 lacs per year per
taxpayer in case of individuals and HUFs. The scheme has a lock-in period of three years from the date of
investment.

• Tax Deducted at Source (TDS)

• There is no TDS on re-purchase proceeds to resident investors. However, for certain cases of nonresident
investments, the same is applicable. The income tax regulations prescribe different rates, depending on the
nature of the investor (Indian/ Foreign and Individual/Institutional), nature of investment (equity/debt) and
nature of the income (dividend/capital gain). In case of dividends (IDCW) from mutual fund schemes, even for
resident Indians, TDS is applicable. The tax is required to be deducted at 10 percent on the dividend amount if it
exceeds Rs. 5,000..

• Further, Government of India has entered into Double Taxation Avoidance Agreements (DTAA) with several
countries. These agreements too, specify rates for Withholding Tax.
 Applicability of GST
AMC(s) can charge GST, as per applicable Taxation Laws, to the schemes within the limits prescribed
under SEBI (Mutual Fund) Regulations.

• GST on fees paid on investment management and advisory fees shall be charged to the scheme in
addition to the overall limits specified as per the Total Expense Ratio (TER) provisions.
• GST on all the fees other than investment and advisory fees shall be charged to the scheme within
the maximum limit of TER.
• GST on exit load, if any, shall be deducted from the exit load and the net amount shall be credited
to the scheme.
• GST on brokerage and transaction cost paid for execution of trade, if any, shall be within the
limit of TER.
• The commission payable to the distributors of mutual funds may be subject to GST, as applicable in
case of the ARN holder. Such tax cannot be charged to the scheme.

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Thank you !