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’.
As per the Budget 2020 proposals, Dividend Distribution Tax (in companies’ hands) will be abolished. TDS will be levied on dividend income from Mutual Fund units, with effective from April, 2020.
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? What are the Budget 2020-21 proposals related to Mutual Funds Taxation? Is TDS applicable on Mutual Fund Capital Gains from FY 2020-21? Will TDS apply to Mutual Fund Dividends from AY 2021-22? What are the Mutual funds taxation & capital gains tax rates on mutual funds for Financial year 2020-2021 (Assessment year 2021-2022).
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). (Related article : ‘Residential Status online calculator.’)
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, ELSS tax saving funds, 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, MIPs, FMPs, Hybrid 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.
Budget 2020 & Mutual Funds Taxation Rules
One of the important proposals of Budget 2020 is ‘abolition of Dividend Distribution Tax’ in companies hands. As DDT will not be paid by the companies, dividend income henceforth (from April 2020) will be taxed and paid by investor, at applicable individual tax slab rates.
Also, if dividend income is in excess of Rs 5,000 then such income will be subject to TDS @ 10%.
(Considering the pandemic and resultant lockdown affecting all sectors of the economy, the Government of India has reduced the rates of Tax Deducted at Source and Tax Collected at Source by 25% on several transactions till March 2021. So, the TDS on dividend income is 7.5% from 14-05-2020 to 31-03-2021.)
“A new section 194K to provide that any person responsible for paying to a resident any income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or units from the administrator of the specified by undertaking or units from the specified company shall at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax there on at the rate of ten per cent. It may also be provided for threshold limit of Rs 5,000/- so that income below this amount does not suffer tax deduction…. (Source : The Finance Bill 2020)
If you are in say 20% IT slab, you receive Rs 10,000 as dividend income (applicable to
Growth or Dividend options of any Fund) then your Mutual Fund AMC will deduct TDS @ 10% and you need to pay the remaining tax dues when you file your Income Tax Return.
As of now, there is a confusion, whether this TDS is applicable on Capital Gains (on sale/transfer of MF units by Resident Indian) or not. I believe that TDS may not be applicable on Capital Gains. But, let’s wait for more clarity from the Govt/CBDT.
It has been clarified by the CBDT that 10% TDS is on Dividend Payments only and it is not applicable on Capital Gains (on Sale or transfer of mutual fund units).
Mutual Funds Taxation Rules FY 2020-21 | Latest Mutual Funds Capital Gains Tax Rates AY 2021-22
Capital Gains Tax Rates on Mutual Fund Investments of a Resident Indian for FY 2020-21 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 10% on LTCG exceeding Rs 1 Lakh.
- 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 2020-21 (Assessment Year 2021-22) are as below;
- The STCG tax rate on equity funds is 15%. In case the short-term capital gains were on account of listed equity shares which were sold on a stock exchange or equity-oriented mutual fund, then the provisions for tax calculations as per section 111A of the Income Tax Act provide that 15% tax is payable by non-residents on a flat basis without getting any benefit of the initial exemption limit of Rs 2,50,000. Unfortunately, the basic exemption limit is available only for resident individuals and HUFs, and not for any other entities. If the short-term capital gains is not on account of either of the two types of sale mentioned above, then the benefit of initial exemption will be available even to non residents.
- 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 10%, on LTCG exceeding Rs 1 Lakh.
- The LTCG tax rate on non-equity funds is 20%on listed mutual fund units and 10% on unlisted funds.
Taxation of Mutual Fund Dividends FY 2020-21
With effective from 1st April 2020, the dividend income received by investors from mutual funds (Equity or Debt funds) will be subject to TDS @ 10%. This TDS is applicable if such income is in excess of Rs 5,000 u/s 194K.
Also, such dividend income is a taxable income in the hands of investor as per his/her income tax slab rate.
NRI Mutual Fund Investments & TDS Rate
Below are the TDS rate applicable on MF redemptions by NRIs for AY 2021-22.
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 :
- New Income Tax Slab Rates Vs Old Tax Regime | Which one is better? | Budget 2020
- Income Tax Slab Rates for FY 2020-21 / AY 2021-22 | Budget 2020 Key Highlights
- How to set-off Capital Losses on Mutual Funds, Stocks, Property, Gold, Bonds & Debentures?
- Top 15 Best Mutual Funds 2021 & beyond | Top Performing Equity Funds
(Above rules are as per Budget 2020 proposals) (Post first published on 02-February-2020)