Mutual fund taxation is dependent on two factors namely: type of the mutual fund and duration of the mutual fund.
There is a well-known proverb that the person should not put all the eggs in one basket and this still holds true. The person should not rely on only one type of investment. Accordingly, one should invest in various plans and funds.
In the current changing scenario, mutual funds are one of the most emerging and promising funds. And, one can invest in these mutual funds through SIP or lumpsum amounts.
Now, read this blog to know about taxation on Mutual Funds SIP.
Before knowing the Mutual Fund taxation, one should know the following questions:
What is Mutual Funds SIP?
Mutual Funds SIP is a Systematic Investment Planning method for investing in mutual funds. The investor through investing by way of SIP has an option to choose the frequency of the investment. Consequently, this frequency can be weekly/monthly/quarterly/bi-annually/annually.
Also Read: 10 ways to save your taxes!
Mutual Funds Taxation
Mutual fund taxation is dependent on two factors:
– Type of Mutual Fund
– Duration of Mutual Fund
Types of Mutual Funds
For purposes of investment and mutual fund taxation, the Mutual Funds are of three types:
Firstly, Equity Mutual Funds:
Equity Mutual funds are those mutual funds that are primarily invested in the stock market. And, on investing in these types of funds, money is invested in equity stocks on behalf of the person and consequently, a portfolio is created. Accordingly, profits or losses in this portfolio affect the person’s Net Asset Value (NAV). These equity mutual funds have further classifications as per various types of funds, namely:
– Small-Cap Equity Funds
– Mid-Cap Equity Funds
– Large-Cap Equity Funds
– Large & Mid-Cap Equity Funds
– Multi-Cap Equity Funds
Note:
Equity mutual funds are those mutual funds whose portfolio’s equity exposure exceeds 65%.
Secondly, Debt Mutual Funds:
Debt Mutual Funds are schemes that invest in fixed-income instruments, such as Corporate and Government Bonds, corporate debt securities, money market instruments, etc. that offer capital appreciation. Having said this, these funds are also referred to as Fixed Income Funds or Bond Funds. And, the investment in these funds is in a variety of securities, on the basis of their credit ratings. The higher the credit rating is, the less volatile it will be. Apart from this, just like equity mutual funds, these debt mutual funds have further classifications into the following types:
– Liquid Fund
– Money Market Fund
– Dynamic Bond Fund
– Gilt Fund
– Long Duration Fund
Lastly, Hybrid Mutual Funds:
Hybrid mutual funds are a combination of the above two mutual funds i.e., Equity Mutual Funds and Debt Mutual Funds. Accordingly, these funds try to create a balancing portfolio to offer regular income to its investors along with capital appreciation. Therefore, the hybrid mutual funds can be either
– Hybrid Equity oriented funds, or
– Hybrid Debt oriented funds
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Duration of mutual fund
The duration of a mutual fund is divided into two types:
– Short Term Mutual Fund
– Long Term Mutual Fund
The bifurcation of mutual funds based on the basis of duration is as follows:
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Taxability of Mutual Fund SIP on basis of Type and Duration
The taxability of mutual fund SIP on the basis of type and duration is as follows:
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Note:
In the case of investment in mutual funds through SIP, each instalment is considered a fresh instalment. Therefore, the holding period of each instalment is calculated.
Illustration 1
Shilpa started a monthly SIP in an equity scheme on 1st January, 2019. And, on 2nd January, 2020 she decided to redeem the entire investment.
In this case, only capital gains on the units purchased from Shilpa’s first instalment (invested on 1st January 2019) will be long-term capital gains as the holding period was more than one year. On the other hand, for the remaining units, the holding period is lower than one year. Hence, the gains will be taxable as per short-term capital gains rates.
Illustration 2
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FAQs
The person can claim deductions under Section 80C by investing in mutual funds. However, such mutual fund must be an Equity Linked Savings Scheme plan. The total savings under 80C that qualifies for deduction is Rs.1.5 lakhs (max).
Yes, ELSS comes with a locking period of 3 years. The investor can’t redeem the units before 3 years.
Mutual funds work as well as per the scenario in the market. Therefore, Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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