What’s the tax on Mutual Fund returns?

These are open-ended, diversified equity schemes that offer tax benefits under 80C of Income Tax Act 1961. The lock in period for ELSS is 3 years.

For many, this is all that is there to know about taxation in mutual funds. The truth is there's much more than what meets the eye. Any returns that are gained from mutual fund investments are also liable for taxation. In fact, the returns are taxed under the 'Income from Capital Gains' header.

In India, capital gains taxes are applied differently based on the duration of the investment. Thus, it can be short-term or long-term based on the holding period of the investment. The tax rates for both categories are different. But before that, investments in mutual fund needs to be categorised as equity or non-equity because the taxation rules for both are different.

To explain this better, let's take up the taxation on a case to case basis

Section 10(38) of the Act grants exemption to any income arising from the transfer of a long-term capital asset, being units of an equity oriented fund, held for a period of more than 12 months, provided the transaction giving rise to the capital gains, attracts Securities Transaction Tax (STT) and is made on or after October 1, 2004 i.e. the date on which Chapter VII of the Finance (No. 2) Act, 2004 has come into force.

The income by way of long-term capital gains of a company would be taken into account in computing the book profits and

Minimum Alternate Tax payable, if any, under section 115JB of the Act (irrespective of whether or not it is exempt under section 10(38) of the Act).

Under section 111A, where the total income of an assessee includes any income chargeable under the head “Capital Gains”, arising from the transfer of a short-term capital asset, being a unit of an equity oriented fund held for a period, not more than 12 months and

(a) the transaction of sale of such unit is entered into on or after October 1, 2004, i.e. the date on which Chapter VII of the Finance (No. 2) Act, 2004 has come into force; and

(b) such transaction is chargeable to STT under that Chapter, the tax payable by the assessee on such short-term capital gains is at the rate of 15 per cent.

Long-term capital gains in respect of units will be chargeable to tax under section 112 of the Act, of the Act at the following rates:

Long-term capital gains in respect of units, held for a period of more than 36 months, will be chargeable to tax under section 112 of the Act, at the rate of 20 % with indexation benefits. In case of resident individuals and HUFs

For tax on long-term capital gains in case of non-residents investors are followings Listed Securities @ 20% with indexation benefits. Unlisted Securities @ 10% without indexation and foreign currency fluctuation benefit.

Short-term capital gains in respect of units held for not more than 36 months is added to the total income of the assessee and taxed at the applicable slab rates specified by the Act.