Capital gains tax on Mutual Funds

Capital gains tax in equity mutual funds 

One important thing for investors to notice is that there's no tax on unrealized gains in mutual funds; incidence of capital gains taxation arises only upon redemption. There are two sorts of capital gains in equity mutual funds. Redemption of equity open-end fund units held for fewer than 12 months results in short term capital gains taxation, while redemption of units held for quite 12 months results in future capital gains taxation.

Short term capital gains are taxed at 15% (plus applicable surcharge and cess). future capital gains of up to Rs 100,000 during a year are tax exempt and taxed at 10% (plus applicable surcharge and cess) thereafter. for instance , if your future financial gain during a year is Rs 200,000, Rs 100,000 are going to be tax exempt and you'll need to pay capital gains tax on Rs 100,000 only at the speed of 10% (plus cess) i.e. tax outgo of Rs 10,400 only. you'll see that from a taxation perspective, equity mutual funds are far more tax efficient than traditional fixed income investments.

Capital gains in non-equity mutual funds 

Let us first understand what non-equity mutual funds are. Any open-end fund scheme, where average equity allocation is a smaller amount than 65% are treated as non-equity mutual funds from a taxation standpoint. Non-equity mutual funds include debt funds, conservative hybrid funds, international funds or fund of funds, gold funds etc. There are two sorts of capital gains in debt mutual funds. Redemption of debt open-end fund units held for fewer than 36 months results in short term capital gains taxation, while redemption of units held for quite 36 months results in future capital gains taxation.

Short term capital gains in non-equity mutual funds are taxed at as per your tax rate; during this regard, tax treatment of short term capital gains in such funds and interest income from bank FDs is same. future capital gains in non-equity funds are taxed at 20% after allowing indexation benefits. Indexation benefits imply that you simply are allowed to index the acquisition cost of your units as per Cost Inflation Index (CII) table supported the year of investment and year of redemption. Indexing increases your cost of acquisition and reduces your capital gains amount, thereby reducing your tax obligation. So for investment tenures of over 3 years, non-equity mutual funds have a big advantage over traditional fixed income investments.