Income Tax on Mutual Funds in India (2024)

FAQs

Income Tax on Mutual Funds in India? ›

These gains are taxed at a flat rate of 15%, irrespective of your income tax bracket. You make long-term capital gains on selling your equity fund units after holding them for over one year.

Short term capital gains (if the units are sold before one year) in equity funds are taxed at the rate of 15% plus 4% cess. Long term capital gains tax in equity funds is 10% + 4% cess provided the gain in a financial year is over Rs 1 Lakh. Long term capital gains upto Rs 1 Lakh is totally tax free.

Just as with individual securities, when you sell shares of a mutual fund or ETF (exchange-traded fund) for a profit, you'll owe taxes on that "realized gain."

Short-term capital gains (assets held 12 months or less) are taxed at your ordinary income tax rate, whereas long-term capital gains (assets held for more than 12 months) are currently subject to federal capital gains tax at a rate of up to 20%.

In the case of Equity Mutual funds, long-term gains are taxable only if your Equity returns in a financial year exceed Rs. 1 lakh. So if your Long-Term Capital Gains from Equity Mutual Funds is less than or equal to Rs. 1 lakh in a financial year, you do not have to pay any Capital Gains Tax on your returns.

No. You are liable to pay taxes on mutual fund returns/ gains only when you sell your holdings. However, the dividend income is added to your total taxable income. Thus, you will have to pay tax on the dividend income every year as per your income tax slab.

Do we have to pay tax on SIPs in India? Taxes are applicable on the redemption of an investment. You can incur a short-term or long-term capital gains tax on mutual fund returns when you redeem your units. These taxes apply similarly to SIP and lump sum investments.

ELSS mutual funds come with a lock-in period of just three years, which happens to be the shortest among all tax-saving investment options under Section 80C of the Income Tax Act, 1961. Therefore, ELSS mutual funds are more liquid as compared to any other Section 80C investment.

Mutual Funds provide earnings in two forms – Capital Gains and Dividends, and these need to be disclosed in the ITR.

Do you get double taxed on mutual funds? ›

You'll owe tax on two levels if a stock holding in your mutual fund pays dividends, then the fund manager later sells the stock at a higher value than they paid for it: A dividend tax, which is generally applied at your income tax rate. A capital gains tax, which will be taxed at capital gains rates.

The formulae for calculating Indexed Cost of Acquisition is; ICoA = CoA X (CII of the Sale Year / Sale of the Purchase Year). Once you have got the indexed cost, just deduct it from the asset value at the time of sale to arrive at the gains after indexation.

The rate of capital gains tax is 10% for basic rate taxpayers unless any of the gain crosses over into the higher rate band when added on top of income (in which case, that part is taxed at 20%) for gains on your investments.

The statutory threshold amounts are: Married filing jointly — $250,000, Married filing separately — $125,000, Single or head of household — $200,000, or.

Some mutual funds are managed specifically to minimize the investors' tax burden, using strategies like: Avoiding dividend-paying stocks. Offsetting capital gains with losses. Holding stocks for an extended period to avoid short-term gains.

Mutual funds invested in government or municipal bonds, also called munis, are often referred to as tax-free or tax-exempt funds because the interest generated by these bonds is not subject to income tax.

You are allowed to invest up to Rs 1.5 lakh in tax-saving funds. You will get a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. a. ELSS funds are the only tax-saving funds within the Rs 1.5 lakh limit which has the additional advantage of giving equity-linked returns.

Distributions and your taxes

If you hold shares in a taxable account, you are required to pay taxes on mutual fund distributions, whether the distributions are paid out in cash or reinvested in additional shares. The funds report distributions to shareholders on IRS Form 1099-DIV after the end of each calendar year.

Public Provident Fund (PPF)

PPF is a government-sponsored savings and retirement planning direct tax free investment. It is beneficial for individuals without a structured pension plan. The interest rate on the PPF is linked to the debt market.

Are there any tax benefits associated with an FD? The interest you receive on your Fixed Deposit amount is taxable. However, you can submit Form 15G to the bank to avoid tax deduction.

Are SIP returns tax free? ›

Investing through SIPs offer high returns on your investments and can even claim a deduction of up to Rs. 1.5 lakh under Section 80(C) of The Income Tax Act, 1961.

In case you have earned any capital gains or losses during a financial year, you need to report that by filing ITR form 2 or 3 (if you are not eligible to file ITR 2). Gains from mutual funds are taxed only in the financial year when the units are redeemed.

If you have Rs. 50 lakhs to invest and want higher returns on it, an equity fund would be your best option. However, this is only for aggressive investors who are not afraid of the risks involved. On the other hand, if you want to play safe, a fixed deposit or a post office scheme would be more beneficial for you.

Indexation benefits in long term capital gains taxation of debt funds, certainly give mutual funds a significant tax advantage over FDs. You should evaluate your financial goals and risk appetite to make informed investment decisions.

SIP Tax Benefit

SIP under Equity Linked Saving Schemes (ELSS) comes under the EEE (Exempt, Exempt, Exempt) category. This means, the amount invested, the amount on maturity and the withdrawal amount all are tax-free. With SIP in ELSS fund, one can claim a deduction of up to Rs.

Generally, mutual funds distribute these net capital gains to investors once a year. Capital gains are taxable income, even if you reinvested the money. You'll probably get an IRS Form 1099-DIV in January showing your portion of the fund's capital gains during the previous year.

What is ELSS SIP? An equity-linked savings scheme or ELSS is a mutual fund class that offers tax rebate under Section 80C of the Income Tax Act, 1961. You can claim tax deductions of up to Rs 1.5 lakh a year by investing in ELSS.

When dividends are reinvested on your behalf and used to purchase additional shares or fractions of shares for you: If the reinvested dividends buy shares at a price equal to their fair market value (FMV), you must report the dividends as income along with any other ordinary dividends.

Disclosing mutual fund income in ITR

They must fill in the details regarding dividend income, and short-term and long-term capital gains in ITR-2. Assessees can fill up the Page 112A specifically included in ITR-2 for disclosing capital gains or losses from both equity and debt mutual fund schemes.

How to claim 1 lakh exemption on ltcg? ›

You should book 1 lakh in Long term capital gains on equity or equity mutual funds every year. Why? Because the first INR 1 lakh in capital gains is considered exempt. Any LTCG (on equity) above INR 1 lakh will be taxed at 10% (plus surcharge and cess).

So, for example, the tax on $1 million for a single person in 2023 is an estimated $328,163. That's a lot of money, but it's still almost $42,000 less than if the 37% rate were applied as a flat rate on the entire $1 million (which would result in a $370,000 tax bill).

Tax Treatment of Reinvested Dividends. Dividends are a form of income, and as such, they must be reported in your income tax return. They are taxable the same way all earned income is taxable even if they are reinvested in stock and the money does not reach the taxpayer directly.

Capital Gains Tax (CGT) is normally charged at a simple flat rate of 20% when you sell shares unless they are in a CGT free investment such as an ISA or qualifying pension. If you only pay basic rate tax and make a small capital gain, you may only be subject to a reduced CGT rate of 10%.

Brokerage accounts (also called non-qualified accounts) are taxed differently than qualified retirement plans like a 401(k) or a 403(b). Even without taking money from the account, your brokerage account will be subject to tax each year.

For equities (excluding listed property companies), dividends withholding tax (DWT) of 20% is withheld before it's paid out or reinvested. Note that DWT is payable only on dividends paid out by the companies, and is payable after the company has already paid 28% corporate tax on its net profits.

Mutual fund dividends are subject to TDS at the rate of 7.5 per cent for dividends in excess of Rs 5,000. TDS is applicable on dividend payout, dividend reinvestment and dividend transfer plan. The capital gains are not subject to TDS for domestic investors.

Tax on Dividends Received from Mutual Fund/Indian Company. An individual is not liable to pay tax on the dividend received from mutual fund if the amount is below Rs. 10 lakh. But if the amount exceeds this limit the investor has to pay 10% of the total earnings as tax during a particular year.

Is SIP better than FD? ›

Systematic Investment Plan is a better investment option in comparison to Fixed Deposit especially if you consider the flexibility of investment, advantage of diversification, tax benefits, and higher returns. That is why it is better to invest in a systematic investment plan than in fixed deposit.

Invest in growth option: Instead of investing in dividend-paying stocks or mutual funds, you can opt for the growth option. Under the growth option, the profits made by the company or mutual fund are reinvested in the business, and no dividend is paid out. Therefore, no TDS is applicable on such investments.

Submit Form 15G/H to avoid TDS on dividend income

The income tax laws allow an individual to submit Form 15G or Form 15H (as applicable) to the financial institution concerned to avoid TDS on the income earned. However, there are eligibility requirements to submit Form 15G/15H.

The TDS deduction will appear in Form 26AS after it has been made. If the ultimate tax due is less than what was actually deducted or if there is no overall tax burden, investors may file their income tax return. If the investor has given the deductor their PAN and Aadhar number, the rate of 10% is applied.

In India, dividends received by an individual or a Hindu Undivided Family (HUF) are exempt from income tax up to a certain limit. The exemption limit for dividend income in India for the financial year 2021-2022 is Rs. 5,000. This means that any dividends received up to this amount are not taxable.

Dividend reinvestment and taxation

Having said that if you invest in equity fund and sell it within one year you will have to pay 15% short-term capital gains tax, but if you sell it after one year, you don't have to pay any tax. For each dividend reinvested the time period is calculated separately.