Updated: 28-10-2020 08:42:40 AM

Mutual Funds can provide earnings in two forms- Capital Gains and Dividends. While capital gains are taxable at the hands of investors, the tax on mutual funds dividends, called Dividend Distribution Tax (DDT) is paid by the fund house (Asset Management Company) on behalf of the investors.

Mutual Funds Capital Gains Taxation for FY 2019-2020

A capital gain refers to the difference between the value at which an investor purchased the units of a mutual fund scheme and the value at which he/she sold or redeemed them. For instance, Mr. X invested Rs. 1 lakh in a mutual fund scheme on April 1, 2016, and the value of his investment on April 1, 2019, is Rs. 1.5 lakh. Then, he has earned a capital gain of Rs. 50,000.

The mutual funds capital gains taxation depends on the type of mutual fund scheme and the investment tenure. On the basis of investment tenure, there are two types of capital gains tax – Short Term Capital Gains Tax (STCG) and Long Term Capital Gains Tax (LTCG).

Type of SchemeParticularsShort Term Capital Gains TaxLong Term Capital Gains Tax
Equity oriented schemesHolding PeriodUp to 12 monthsMore than 12 months
Tax Rate15%10%*
Non-equity oriented schemesHolding PeriodUp to 36 monthsMore than 36 months
Tax RateIncome Tax Slab Rate of Investor20% after indexation

*Long-term capital gains on equity mutual funds are exempt up to Rs. 1 lakh per annum. For example, if your long-term capital gain in FY 2018-19 is Rs 1.5 lakh, only Rs. 50,000 will be taxable as LTCG.

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Let’s understand indexation better with the help of an example. Assuming that Mr. X invested Rs. 100 in a debt fund in FY 2015-16  and sold it for Rs. 150 in FY-2018-19. Since Mr. X sold it after 3 years, the gain is long term and an LTCG tax of 20% with indexation is applicable. The CII in FY16 was 254 and in FY19, it was 280. As a result, Mr. X’s purchase price for tax purposes will be raised to (280/254)*100 = 110 and his taxable gain will be 150 – 110 = 40. The tax payable will be 20% of 40 = Rs. 8 and not Rs. 10 (20% of 50).

  • Capital losses incurred on a mutual fund scheme can be adjusted against the capital gains earned on another mutual fund investment of the same year. This set-off cannot be done against any other head of income.

Mutual Funds Dividends Taxation for FY 2020-2021

Dividend is a part of the profit that a company earns and distributes amongst its investors. Dividend Distribution Tax is a liability that a company must pay to the government according to the dividend paid to the company’s investors.

As of FY 2019-20, DDT is payable to the government not by the investor but by the fund house managing the mutual fund. In most schemes, DDT rate is around 30%. However, according to the recent budget for FY 2020-21, Dividend is taxable at the hands of the investor and not the fund house. Hence, as it stands DDT has been abolished under the new tax regime.

Tax Benefit of Mutual Funds

Equity-Linked Savings Scheme (ELSS) is a type of equity fund and the only mutual fund scheme which qualifies for a tax deduction of Rs. 1.5 lakh per annum under Section 80C of the Income Tax Act. An ELSS comes with a lock-in period of 3 years which means an investment made in it cannot be withdrawn before 3 years.

Also Read: Best ELSS – Top 10 Tax Saving Mutual Funds for FY 2019-2020.

Securities Transaction Tax (STT)

A Securities Transaction Tax (STT) is applicable at the rate of 0.001% on equity oriented mutual funds at the time of redemption of units. An investor is not required to pay STT separately as it is deducted from the mutual fund returns.

List of Top Tax Saving (ELSS) Mutual Funds for FY 2020

Fund Name3 Year Returns5 Year Returns
Mirae Asset Tax Saver19.82%
Axis Long Term Equity Fund19.21%13.20%
Tata India Tax Savings Fund17.50%13.76%
Motilal Oswal Long Term Equity Fund17.13%
Invesco India Tax Plan15.52%11.98%
DSP Tax Saver Fund15.25%12.08%
Aditya Birla Sun Life Tax Relief 9614.83%11.54%
Kotak Tax Saver14.57%11.03%
IDFC Tax Advantage Fund13.54%9.95%
L&T Tax Advantage Fund12.86%9.79%
ICICI Prudential Long Term Equity Fund (Tax Saving)12.45%9.40%
Principal Tax Savings Fund11.90%9.03%
Franklin India Taxshield Fund11.48%8.96%
SBI Magnum Taxgain Scheme9.84%6.98%
Reliance Tax Saver Fund7.08%4.67%

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