Capital asset typically refers to anything that you own for personal or investment purposes. It includes all kinds of property; movable or immovable, tangible or intangible, fixed or circulating.
Capital assets are further classified as Financial Assets and Non-Financial Assets. Financial assets are intangible and represent the monetary value of a physical item. Stocks (Shares) and mutual funds are the best examples of Financial Assets.
The profit (if any) that you make on your mutual fund investments when you redeem or sell the MF units is referred to as Capital Gains. It can be a Short Term Capital Gain (STCG) or a Long Term Capital Gain (LTCG) depending upon the ‘Period of Holding’. The tax that is applicable on these profits is known as ‘Capital Gains Tax’.
In this post let us understand: What are the factors that determine the tax status of mutual funds? – What are the tax implications on mutual fund investments? – Mutual funds taxation & capital gains tax rates on mutual funds for Financial year 2017-2018 (Assessment year 2018-2019).
Factors determining the tax status of mutual funds
The capital gains tax on mutual fund withdrawals is based on the factors as below;
- Residential Status
- Fund Type (whether the fund is an Equity-oriented fund (or) a Non-Equity Oriented Fund)
- Holding Period (Duration of your investment)
1. Residential Status & Mutual Funds Taxation
The capital gains tax rates are determined based on the residential status of an individual / investor. Residential status can be either ‘Resident Indian’ or ‘Non-Resident India” (NRI).
2. Type of Funds & Mutual Funds Taxation
What are Equity-oriented Mutual Funds? – MF schemes that invest at least 65% of its fund corpus into equity and equity related instruments are known as equity mutual funds. Examples are : Large cap, Mid-cap, Balanced funds (equity oriented), Sector funds etc.,
What are Non-Equity Mutual Funds? – MF schemes that hold less than 65% of their portfolio in equities and equity related instruments are known as Non-Equity Funds / Debt funds. Examples are : Liquid Mutual funds, Money Market funds, Gold funds, Infrastructure debt funds, Balanced funds (Debt oriented) etc.,
3. Period of Holding & Capital Gains on Mutual Funds
Capital gains on Mutual funds could be either long term capital gains or short term capital gains, depending on your investment horizon.
- Long Term Capital Gains
- If you make a gain / profit on your investment in a Equity Mutual Fund scheme that you have held for over 1 year, it will be classified as Long Term Capital Gain.
- If you make a gain / profit on your investment in a Non-Equity Mutual Fund scheme (or in a Debt Fund) that you have held for over 3 years, it will be classified as Long Term Capital Gain.
- Short Term Capital Gains
- If your holding in a Equity mutual fund scheme is less than 1 year i.e. if you withdraw your mutual fund units before 1 year, after making a profit, then the profit will be considered as Short Term Capital Gain.
- If you make a gain / profit on your Debt fund (or other than equity oriented schemes) that you have held for less than 36 months (3 years), it will be treated as Short Term Capital Gain.
Capital Gains Tax Rates on Mutual Funds for FY 2017-18 (AY 2018-2019)
Capital Gains Tax Rates on Mutual Fund Investments of a Resident Indian are as below;
- The STCG (Short Term Capital Gains) tax rate on equity funds is 15%.
- The STCG tax rate on Non-Equity funds (or) Debt funds is as per the investor’s income tax slab rate.
- The LTCG (Long Term Capital Gains) tax rate on equity funds is NIL.
- The LTCG tax rate on non-equity funds is 20% (with Indexation benefit)
Capital Gains Tax Rates on NRI Mutual Fund Investments for the Financial Year 2017-18 (Assessment Year 2018-19) are as below;
- The STCG tax rate on equity funds is 15%.
- The STCG tax rate on Non-Equity funds (or) Debt funds is as per the investor’s income tax slab rate. (Tax Deducted at Source – TDS @ 30% is applicable)
- The LTCG tax rate on equity funds is NIL.
- The LTCG tax rate on non-equity funds is 20% (with Indexation) on listed mutual fund units and 10% on unlisted funds.
Mutual Funds Taxation Rules on Dividends
- Dividends on Equity Mutual Funds : The dividend received in the hands of unit holder for an equity mutual fund is completely tax free. The dividend is also tax free to the mutual fund house.
- 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%.
NRI Mutual Fund Investments & TDS Rate
Below are the TDS rate applicable on MF redemptions by NRIs for AY 2018-19.
Budget 2017-18 Update :
Base Year & Indexation : 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.
- For example: Suppose you are holding on to your investments made in debt funds (or) Property before 2001, the Fair Market Value (NAV) as on 1 st April, 2001 will be considered as cost of acquisition for calculating capital gains. This will help the investor to reduce the capital gains taxes.
- As of now, the base year is 1981. To calculate the capital gains at the time of selling any property purchased before 1981, its purchase price is now calculated on the basis of the fair market value of 1981. Calculation at the fair market value of 2001 will increase the cost of acquisition and lower the capital gain.
Budget 2018-19 update :
As per the existing tax rule, equity investors need not pay any tax on long term capital gains. If investments in equity mutual funds or Stocks are sold within a year, gains will be treated as short term capital gains and taxed at 15 %. The finance minister in his Budget 2018-19, has proposed to tax long term capitals gains of over Rs 1 lakh at 10% without indexation benefit. For more details, kindly go through my latest article, click here….
Hope this post is informative. Do you check your capital gains statement(s) every year? Do you include your capital gains taxes (if any) in Income Tax Returns (ITR). Share your comments.
Continue reading :
- Income Tax Deductions List FY 2018-19 | List of important Income Tax Exemptions for AY 2019-20
- Mutual Funds Capital Gains Taxation Rules FY 2018-19 (AY 2019-20) | Capital Gains Tax Rates Chart
- Different Asset classes (Stocks, Real Estate, Debentures, Gold etc.,) have different Tax implications – How are Investment Returns taxed?
(Assumption – STT (Securities Transaction Tax) is payable) ( Image courtesy of Stuart Miles at FreeDigitalPhotos.net)