Understanding Taxes on Mutual Funds

Indian investors are increasingly taking the mutual fund route in the recent past. However, many are unclear about how they will be taxed on returns. Budget 2018 has made some significant amendments regarding this and it is worth understanding before the tax filing season.

Long-term capital gains or LTCG tax on equities
Prior to 2018’s Union Budget, if you hold on to your equities (shares of companies) for more than a year, the returns will be tax-exempt. Now, the capital gains (selling price minus cost price) is more than 1lakh after one year, an LTCG tax of 10% applies. Worry not, there is a ‘Grandfathering clause in LTCG’. Investors holding on to their equities enjoy the benefit of grandfathering of gains up to 31 January 2018 – this means, you need not pay tax on units you purchased after December 2017.

Short-term capital gains or STCG tax on equities
There has been no change in the STCG rules. As always, any capital gain you make by selling your equity units before one year of acquisition can attract 15% STCG tax.

Tax on Dividends
If an investor opts for it, he can avail dividends by equity mutual funds (depends on the performance). There is a 10% tax on dividends called Dividend Distribution Tax (DDT) now as opposed to earlier when they were tax-exempt. The DDT causes a dip in Net Asset Value of the fund, impacting the investor indirectly.

Sale of SIP units
In a SIP (Systematic Investment Plan), you invest regularly (monthly or quarterly) in an ELSS plan. However, every instalment is considered a new investment based on the date of the transaction. So, long-term holding and short-term holding of units are calculated accordingly for each SIP.

Redeeming mutual funds units through Systematic Withdrawal Plan
In an SWP, you can draw or redeem a pre-agreed amount systematically – and there are some gains on each withdrawal. On the other hand, in a Systematic Transfer Plan, the amount gets transferred from one fund to another fund. The taxability is the same as SIPs.