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Taxation of MF Categories

Taxation of MF Categories

Investing in mutual funds is a smart option for many looking to grow their wealth and achieve financial goals. However, understanding the taxation of different mutual fund categories is essential for optimising returns and managing tax liabilities effectively. 

Add the below content in tabular format.

Fund TypeShort-term capital gainsLong-term capital gains
Equity fundsShorter than 12 months12 months and longer
Debt fundsAlways short-term
Hybrid equity-oriented fundsShorter than 12 months12 months and longer
Hybrid debt-oriented fundsAlways short-term

Read on to understand the taxation rules for various mutual fund categories.

Taxation Rules for Mutual Fund Categories

Add the below content in list format.

1. Equity Fund Taxation: These funds invest in equity shares of companies. The taxation of equity funds is as follows:

i. Short-term Capital Gains (STCG): The gains are considered short-term if you sell equity fund units within 12 months of purchase. They are taxed at a flat rate of 15% plus applicable surcharge and cess.

ii. Long-term Capital Gains (LTCG): Gains from equity fund units held for over 12 Months are taxed at 10% on gains exceeding Rs. 1 lakh in a financial year without indexation benefits.

2. Debt Funds Taxation: These funds invest in fixed-income securities like bonds and debentures. Their taxation is as follows:

All gains on debt fund are considered as STCG irrespective of the holding period and are taxed as per investor’s tax slab.

3. Hybrid Fund Taxation: These funds invest in a mix of equity and debt instruments. Their taxation depends on their equity exposure:

I. Conservative Hybrid Funds: Equity allocation of 10% to 25% and a debt allocation of 75% to 90%.

Taxed at the investor’s income tax slab rate irrespective of the holding period.

II. Balanced Hybrid Funds: In balanced hybrid funds offers diversified portfolio where equity allocation is of 40% to 60% and debt allocation is of 60% to 40%. For units held for 36 months or more shall be termed as long term, others will be short term. Short Term shall be taxed at slab rate while long term shall be taxed at 20% with Indexation benefit.

III. Aggressive Hybrid Funds: Higher equity allocation, between 65% and 80%, and a lower debt allocation of 35% to 20%. For units held for 12 months or more shall be termed as long term, others will be short term.

i. Short-term capital gains (STCG): Taxed at a flat rate of 15%.

ii. Long-term capital gains (LTCG): Gains exceeding Rs. 1 lakh attract a tax rate of 10% without indexation.

4. Fund of Funds (FoFs) Taxation: FoFs invest in other mutual fund schemes. Their taxation is based on the underlying funds they invest in:

i. Equity-Oriented FoFs: If a FoF invests in equity-oriented funds meeting specific criteria, it is treated as an equity-oriented fund for tax purposes.

ii. Non-Equity-Oriented FoFs: FoFs not meeting the equity-oriented criteria are taxed like non-equity-oriented funds.

5. Gold Funds Taxation: Gold funds invest primarily in gold-related instruments like physical gold, gold ETFs, or mining companies. Here’s how their taxation works:

i. Capital gains from gold funds are taxed at the investor’s slab rate, irrespective of the holding period.

6. International Funds Taxation: International or global or overseas funds invest in assets outside India. International Funds Taxation is as follows:

i. international funds with less than 35% exposure to Indian equities will be taxed similarly to debt funds.

ii. These international funds’ capital gains will be considered short-term capital gains, regardless of the holding period.

Final thoughts

Consult with Tata Capital Wealth’s financial experts for personalised advice based on your investment portfolios and financial objectives. 

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