Mutual fund Demystified. (Part 2). MF Taxation in India for resident individuals

Hope you have read the earlier article named mutual funds demystified. part 1. basics which explained mutual fund and its types. Now lets look at the taxes on mutual funds.

The Tax on mutual funds can be divided into the following three heads
Capital Gains Tax ( Short term capital gains-STCG & Long Term Capital Gain-LTCG)
Dividend Distribution Tax. (DDT)
Securities Transaction Tax (STT).

Equity Mutual Fund: As per Indian tax law an equity mutual fund is a fund with more than 65% invested into equity or equity related products. Most of the balanced funds like HDFC Prudence or DSPML Balanced etc take this advantage by investing more than 65% in equity related instruments. This 65% of the fund is calculated by the weekly average net assets method.

So what are the tax rates for equity MF?
STCG – 10% (11.22% with surcharge, IT@10%+ surcharge 10%+ Education cess 2%)
LTCG - 0%
DDT - 0% (Dividends from equity MF are totally tax free)
STT -.25%

Debt Mutual Fund
A fund with less than 65% in equity or equity related instruments. Check mutual funds demystified part 1 for details. There are also funds which invests 100% into global equities (outside india) also called international funds wherein the debt fund rule applies.

Debt MF Tax rates
STCG - As per the individuals tax rate
LTCG- 20% with indexation or 10% without indexation. Indexation is factored to increase the cost price of the MF due to inflation.
DDT – 28.3% for liquid funds and 22.7% for other than liquid debt funds.
STT –0%

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