The capital gains tax on mutual fund returns depend on which type of fund it is equity or debt. Similarly, the tax on dividend from mutual funds also depend on fund type.
The assets under management of Indian mutual fund industry has crossed ₹ 25 trillion mark. As on August 31, 2018, the asset base stood at ₹ 25.2 trillion, according to data from AMFI or Association of Mutual Funds in India. The income tax rules on mutual fund gains and dividends depend on the type of fund — debt or equity — and the duration of investment. The growth in the Indian mutual fund industry is also being driven by SIP or systematic investment plan accounts through which investors invest regularly in fund schemes. The total amount collected through SIPs during August 2018 was ₹ 7,658 crore and the number of SIP accounts stood at 2.38 crore.
How your mutual fund gains, dividends are taxed: 10 things to know
2) If you redeem your equity fund investments within a year, returns or gains are treated as short-term capital gains and taxed at 15%.
3) On the other hand, gains on equity mutual funds held for more than a year are treated as long-term capital gains. And you have to pay a 10% tax on gains exceeding ₹ 1 lakh a year on equity investments.
5) Dividends from equity mutual funds are tax-free in the hands of investors. But dividends from equity mutual funds are paid after deducting a dividend distribution tax (DDT) of 11.648% (including surcharge and cess), which reduces the in-hand return for investors.
6) Arbitrage mutual funds, which invest in arbitrage opportunities in cash and derivative segments of the equity markets, are treated as equity funds for the purpose of taxation.
7) For income tax purposes, international funds (which invest in stocks abroad) and fund of funds (a mutual fund scheme that invest in different mutual funds) are considered as debt funds. Tax rules that apply to debt funds are also applied to gains or returns from international funds and fund of funds.
9) If the holding period of debt fund investments is more than three years, returns are considered as long-term capital gains for taxation purpose and taxed at 20% with indexation benefit. Indexation means adjustment of gains after taking inflation into consideration. So if you have invested in a debt fund for over three years, you will be paying taxes only on the returns over and above the inflation-adjusted initial investment.