Tax on Equity Mutual Funds
Taxation on Equity Mutual funds u/s 10(35)
Equity mutual funds are subject to capital gains tax depending on whether the gain on sale is categorized as short term or long term capital gains. Capital gains tax rates are same for both Resident Indians and Non Resident Indians.
Unlike debt mutual funds, there is no dividend distribution tax on distribution of dividend income on equity mutual funds.
| Type of Tax | Tax rate |
|---|---|
| Short Term Capital Gains Tax (under section 111A) | |
| Resident Indian | 15% |
| Non Resident Indian | 15% |
| Long Term Capital Gains Tax [(Exemption under section 10(38)] | |
| Resident Indian | Nil |
| Non Resident Indian | Nil |
| Dividend Distribution Tax | Nil (as per section 115R) |
What are Equity Mutual Fund?
Equity mutual fund is a type of mutual fund scheme in which a significant proportion of its assets under management is principally invested in stocks including equity stock market. They fall in the category of “Stock Mutual Funds” that are defined as funds with at least 65% of portfolio invested in equity and equity related instruments. All mutual funds, including equity mutual funds, balanced funds, sectoral funds, large cap funds, mid cap funds and small cap funds etc are categorized as equity mutual funds or stock mutual funds.
Example - large cap funds, mid cap funds, small cap funds, sectoral funds, balanced funds (equity oriented)
How is capital gains tax computed on equity mutual funds?
Capital gains arising on sale of equity mutual funds attract capital gains tax only, if the period of holding has been less than a year. Equity Mutual Funds are exempted from paying long term capital gains tax which means if you sell your holding in equity mutual fund after 1 year of holding, you will not be required to pay any capital gains tax on such transaction.
Illustration 1: Calculation of capital gains tax in case you sell a equity mutual fund before 1 year of holding
Mr. B, an Indian resident, sells his investment in equity mutual fund at Rs. 25,000 on 20th March, 2017. He had purchased the scheme at Rs. 18,000 on 15th April 2016. What will be his capital gains tax liability?
Mr. B, earns a capital gain of Rs. 7,000 on his sale transaction. Since his holding period is less than 12 months, he is liable to pay short term capital gains tax at the rate 15% which translates into a capital gain tax liability of Rs. 1,050 on this transaction
| Computation of Capital Gains Tax | Rs. |
|---|---|
| Selling Price of equity mutual fund | 25,000 |
| Cost of acquisition | 18,000 |
| Short Term Capital Gains | 7,000 |
| Short Term Capital Gains rate @15% | 1,050 |
Capital gains on sale of equity mutual funds sold after 12 months of holding period is treated as long term capital gains
Equity mutual funds are exempted from paying long term capital gains tax under section 10(38) of Income Tax Act which means if you sell your holding in equity mutual funds after 12 months of holding, you are not required to pay any capital gains tax on such transaction.
How much dividend distribution tax (DDT) is charged on equity mutual funds?
Any distribution of income on equity mutual funds is completely tax free in the hands of investor. Further, there is no dividend distribution tax on equity mutual funds, which means that a mutual fund house is also not liable to deduct tax on dividends declared on equity mutual fund scheme.
Note: DDT is the abbreviation for 'Dividend Distribution Tax' which refers to the tax deducted or charged by the fund house (mutual fund company), on any divided declared and distributed to its investors.
- 2017-07-26 : Tax base moves up to 6.26 crore in 2016-17
Central Board of Direct Taxes (CBDT) has revealed that income taxpayer base in India has substantially rose to 6.26 crore at the end of the last fiscal year as compared to nearly 4 crore during the corresponding quarter of the previous fiscal year. Post demonetisation, the Income Tax department has taken a host of measures to increase tax base and the statement of financial transaction (SFT) report filed by banks showing widening of taxpayer base. - 2017-07-21 : Income Tax department to launch mobile app to make life easy for taxpayers The IT department has announced that soon it will launch a mobile app, ‘My Tax app’ that will act as an engine to resolve queries related to income tax. The new app has been launched to facilitate the taxpayers by providing them with requisite information.
- 2017-07-20 : IT department identifies 5.56 lakh individuals with tax discrepancy IT department has identified 5.56 lakh individuals based on their tax profile which reflectsinconsistency in the amounts deposited by them during the demonetisation drive. Simultaneously, the individuals who did not disclose the information relating to their bank accounts were also identified via e-verification during the first phase of Operation Clean Money.
- 2017-07-20 : Government makes changes to income tax laws for FY18 In a bid to make income tax filing easier for the taxpayers, the government has introduced some changes to the Income Tax laws for FY18. Starting from July 2017, enrolment ID of Aadhaar application form has been made mandatory for filing Income Tax return. The department has also introduced one page ITR form for those individuals whose non-business income is up to Rs. 5 lakh. Similarly, individuals who are receiving income of up to Rs. 50 lakh from salary, one house property and bank deposits can use ITR 1, individuals and HUFs receiving income from selling real estate, stocks and gold can file ITR 2.
- 2017-07-11 : Tax department launches Aaykar Setu for taxpayers The Income Tax department has introduced a new mobile app, Aaykar Setu. The mobile app aims to facilitate the taxpayers by providing the solutions related to the tax issues. The app is currently available for download on the android platform.