One of the concerns of investors in various instruments including mutual funds is the tax impact of their process of investing and how this needs to be disclosed. There is more worry when they find that there is no space in the income tax return to show the details and hence this can lead to a tough time for them. However the actual condition is quite simple and by following a clear path investors can ensure that they are on the right process and that there is no cause for any confusion. Here is a detailed look at how investors can handle this kind of questions.
In normal circumstances when an investor goes to put money into a mutual fund scheme there is no immediate tax impact unless there is a deduction to be claimed. There is no need to show any investment into a mutual fund unless you are planning to take a deduction for this purpose. A deduction means a reduction in the taxable income of the individual to the extent of the investment actually made. So for example if the taxable income of the person is Rs 6 lakh and there are Rs 1 lakh of eligible deductions then the tax would be calculated on the balance of Rs 5 lakh. The investment into a normal mutual fund is like any other investment and there is no interest of the tax department when one makes an investment unless the investment is large and it does not match with your income. If there is any income that arises from the investment then the tax department would want to know about this.
There are two mutual fund investments in the form of equity linked savings schemes (ELSS) and pension plans offered by the funds that are eligible for a deduction under Section 80C. This means that the amount invested in these funds during the year would get a tax deduction upto Rs 1.5 lakh. This is not a separate deduction but the total from all eligible investments under Section 80C has to be considered when claiming the amount. If one is going to claim the investment made in these specific schemes then these would need to be shown under the Section 80C column in the tax return. This is essential otherwise the investment could end up being wasted. For any other mutual fund investment there is no tax benefit available on investing.
There are a couple of ways in which the income might arise from a mutual fund. If one has chosen the dividend option then the investor would receive a dividend which is nothing but a payout of the gains that have been earned by the mutual fund. The dividend that is received in the hands of the investor is tax free. This means that they do not have to pay tax on this but they need to show this in the section that has tax free income. It is essential that even though there is not tax to be paid on the amount the figure is shown where it is required.
Capital gainsThe other way in which an investor can gain from a mutual fund investment is through earning a capital gain. This means selling the units for a value that is higher than the value at which they were bought. If there is a gain then there might have to be a tax paid on it. The nature of the investment whether it is a debt fund or an equity fund determines the exact impact for the investor. In a debt fund selling the units at a gain before three years is short term capital gains and after 3 years is long term. The period for equity funds for the distinction is 1 year and depending on where the gains fall they have to be shown in the appropriate area with its tax impact.