Mutual Fund Taxation in India

by Hemant Beniwal on December 2, 2011

There are very few things in this world which are both “Legal” & “Lethal”. TAX is one of them. If not understood or paid in a proper way, it is enough to give you hypertension which is one of the most common reasons for a heart stroke. See, I made you look gloomy and stressful. Hence it is very important to have elementary knowledge of Tax Provisions.

t123 286x300 Mutual Fund Taxation in IndiaI believe most of the readers are new to the Mutual Funds so they will have many queries on taxation of Mutual Funds. So, here is an attempt to cover Mutual Fund Taxation for individuals, HUF & NRIs.

Income from Mutual Fund can be divided into 2 parts Capital Gain (increase in value of your investment) or dividends that investors receive on regular intervals if they have opted for dividend plans. So taxation of Mutual Funds in India can be divided in 2 parts Capital Gain & Dividends.

Capital Gain Taxation on Mutual Funds

Capital Gain is appreciation in the value of asset – if you buy something for Rs 1 Lakh & sell it for Rs 1.5 Lakh, you have made a Capital Gain of Rs 50000. Capital Gains are further divided into short term & long term depending on their investment horizon.

Short term capital Gain arises if investment is hold for less than 1 year or in simple words sold before completion of 1 year. Here 1 year means 365 Days.

Long Term Capital Gain arises if investment is sold after 1 year.

Mutual Fund Capital Gain Tax further depends on which type of fund it is – Equity or Debt.

Capital Gain Tax on Equity Mutual Funds

Equity Mutual Funds are those funds where equity holding is more than 65% of the total portfolio so even balanced funds will be categorized in Equity Funds. Fund of Funds (mutual funds which invests in other funds) & international funds (funds which have more than 35% exposure to international equities) will be kept under debt category for tax purpose.

Long Term Capital gain on Equity Mutual Funds – if you buy & hold an equity Mutual Fund for more than 1 year, there will be NIL Tax. Eg. If you invest Rs 1 lakh in XYZ Fund & after 1 year, its value is Rs 1.3 Lakh – there will be zero tax on capital appreciation of Rs 30000. This is a very big advantage of equity mutual funds.

Short Term Capital gain on Equity Mutual Funds – if you sell equity mutual fund before completion of 1 year you need to pay tax of 15% on capital gains. In the above example where gain was Rs 30000 – if this was a short term capital gain, investor would have paid Rs 4500 as short term Capital Gain.

Note for NRIs – Same capital gain is applied for NRIs but in case of Short Term Capital Gain there will be a TDS (tax deducted at source). Which means Tax will be deducted by Mutual Fund Company before paying redemption (sell) amount.

Capital Gain Tax on Debt Mutual Funds

All other funds which will not qualify as equity fund, including Fund of Fund & international Fund will be part of debt mutual funds. Definition of Short Term & Long Term is same as mentioned in equity category.

Short Term Capital gain on Debt Mutual Funds – any short term capital gain that arises due to selling of debt fund before 1 year will be added to investor’s income. Once it is added to income it will be taxed according to tax slab of that individual.

Long Term Capital gain on Debt Mutual Funds – here taxation depends on whether investor would like to use indexation or not. (To understand more on indication read this article – Taxation on Fixed Maturity Plans.

  • Without Indexation – 10% tax on capital gains
  • With Indexation – 20% tax on capital sains

Note for NRIs – NRIs will receive their redemption amount only after tax:

  • Short Term – 30% TDS
  • Long Term – 20% TDS
  • Cess of 3% will also be applied to this TDS.

Shailesh asked couple of questions regarding capital gain taxation on mutual funds – hope this will help you to understand the concept better:

“I know that some short term as well as long term tax need to paid on redemption of mutual fund, but I don’t know where to pay and how much to pay.

Can you please take following scenario and help me out to calculate tax?
Suppose my salary income is Rs. 8,50,000 per annum, I am in 20% tax slab. Apart from that only mutual fund income is there.

1. I have purchased Equity mutual fund Rs. 10000 on 20-04-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year?

Ans. Here Long Term Capital Gain on Equity is applied – So NIL tax.

2. I have purchased Equity mutual fund Rs. 10000 on 20-04-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year?

Ans. Here Short Term Capital Gain on Equity is applied – So 15% tax on gains or Rs 150.

3. I have purchased Debt mutual fund Rs. 10000 on 20-04-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year?

Ans. Here Long Term Capital Gain on Debt is applied – So 10% tax or Rs 100 (I am assuming that Indexation is not used).

4. I have purchased Debt mutual fund Rs. 10000 on 20-04-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year?

Ans. Here Short Term Capital Gain on Debt is applied – so appreciation of Rs 1000 will be added to your income tax & taxed according to your slab.

5. I have purchased hybrid mutual fund(say HDFC Balanced) Rs. 10000 on 20-04-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year?

Ans. As I told you earlier that balanced funds or funds with more than 65% in equities are qualified as Equity Funds – so answer will be same as question 1.

6. I have purchased hybrid mutual fund(say HDFC Balanced) Rs. 10000 on 20-04-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year?

Ans. Same as Question 2”

Hope now you have clear idea about capital gains. Let’s see second part of income from mutual fund – that is Dividend Income.

Mutual Fund Dividend Taxation

Again this taxation will depend on which type of Mutual Fund you are investing in – Equity or Debt.

There is no dividend distribution tax on equity mutual funds & also the dividend received by investors is tax free. So, again a bonus for equity mutual fund investors.

Even in case of Debt Mutual Funds – dividends received by investor are tax free in their hand or they don’t need to show it as a taxable income. But there is dividend distribution tax paid by mutual funds to income tax department.

Dividend Distribution Tax on Debt Mutual Funds

Here there are many tax slabs depending on the investor category but we will only be talking about Individuals, HUF & NRIs.

This taxation further depends on type of Debt Funds:

Dividend Distribution Tax on Liquid/Money Market Schemes

Liquid/Money Market Schemes means Debt oriented funds which invest in money market instruments or in securities that have maturity of less than 90 days.

Here 27.038% tax (25% Tax + 5% Surcharge + 3% Cess) will be deducted from the dividends.

Dividend Distribution Tax on Debt Funds other than Liquid/Money Market Schemes

Here 13.519% tax (12.5% Tax + 5% Surcharge + 3% Cess) will be deducted from the dividends.

In equity mutual funds there is not much difference whether you invest in a growth or dividend option.  (Leaving 2-3 special cases) In debt it is very important that investor should select dividend or growth depending on his time horizon & tax slab.

According to the Finance Bill 2013, the DDT applicable for debt funds has increased from 12.5 per cent to 25 per cent for individuals and HUFs. DDT applicable to any person other than an individual or HUF i.e. a firm, or a company, continues to be 30 per cent.

If you still have any query related to Mutual Fund Taxation – feel free to ask. If you think this article was helpful to understand this concept, must share it with your friends.

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{ 97 comments… read them below or add one }

1 ANIL KUMAR KAPILA

Hi Hemant
Very useful post. I have one doubt regarding tax with indexation and without indexation. You have mentioned
Long Term Capital gain on Debt Mutual Funds – here taxation depends on whether investor would like to use indexation or not.
With Indexation – 10% tax on capital sains
Without Indexation – 20% tax on capital gain
I think here 10% and 20% need to be interchanged.

Reply

2 Hemant Beniwal

Done. :)

Reply

3 Santy

Hi
I had invested in Liquid Fund (Growth option) and had sold it after 3 months. Can you clarify if this gain will be added to my taxable income? I was under the impression that this would be exempt from taxation (based on another blog site).

Regards,
Santy

Reply

4 Hemant Beniwal

Hi Santy,
Yes, it will be included in your income if you will redeem it before completion of 1 year. If you would have gone for Dividend Reinvestment – in that case there was chance that you don’t need to pay tax.

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5 deepak

liquid fund After 1 year is it tax free?

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6 Kannan

ok. If I redeem equity diversified MF before completion of 1yr, I pay tax on the gain, if any. What if I am redeeming at loss. Does the loss amount get deducted from my net taxable income for that year?

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7 Hemant Beniwal

Hi Kannan,
Short term loss can be adjusted with short term & long term gains. If you don’t have gains to adjust – you can carry forward the losses for 8 years.

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8 Nitin

put some light on capital loss carry forward , if some one have a short term capital loss 2 years back in mutual funds ( equity / debt mutual fund ) , can he adjust those losses against mutual fund ( equity /debt if differ pls explain) this year by having capital gain this year . i think capital gain arising from any source can be same , equity / debt doesnt make difference? it quite urjent ,, reply soon

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9 Rajesh

There are certain FMPs which have tenure less than a year, what type of tax will be applicable to such FMP’s

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10 Hemant Beniwal

Hi Rajesh,
If you go for growth plan – appreciation will be included in income. If you go for dividend plan – dividend distribution tax will be deducted & you may not need to pay any tax.

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11 Pramod Bhatkar

Dear Mr. Hemant, Thank you very much for this important information. In fact, I am taken throughout the day today while going through various articles !
Thanks again for the valuable knowledge awake thru’ this !

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12 Hemant Beniwal

Thanks Pramod
Must Share TFL with your friends.

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13 Debashish

Thanks Sir,
It is really a valuable information for me. I just raised a doubt, need a clarification on this. Kindly tell me that
In Equity linked MF – dividend distribution tax is paid by MF companies & in Debt linked MF- dividend distribution tax is paid by Individual himself.

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14 tony gomes

hi Hemant ji,
I m so much confused now with my mutual fund investment,
I have 15 lakhs in equity since 4 years now and i don’t want to redeem it now,
since i don’t need it now, it is for my retirement only,
how much tax will I pay after 5 more years?
Should i keep it invested or should I redeem it and reinvest it again in SIP.
Waiting for your advice.

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15 Hemant Beniwal

Hi Tony,
I believe there are 2 questions – first on taxation & second on investment. I am assuming that your investments are in equity mutual funds – currently there is no long term capital gain tax in equity mutual funds. If you sell it today or if you sell it even after 5 years there is going to be no tax. Things may change or remain same after new direct tax code but still it is not clear.
Coming to your second question – if you are happy with your fund selection stay invested. There is no need to redeem it & again invest it through SIP or STP at these levels of market.

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16 tony gomes

Thanks so much, you really took my worries off me, and yes they are all in equity
my next step is to diversify and include some debt instrument in it
my asset allotment is like this-
shares- 15%
equity MF – 60%
FMP – 15%
Gold – 10%
What do you think about my allotment.
One thing I want to share with you, this is all because of your site-TFLGUIDE
I want to thank you from the bottom of my heart
Happy and bright new year for you, your family and all our loyal followers of TFL, may God bring happiness to everyone’s life financially.
regards and best wishes for your GREAT work to make common people
financially literate.

Reply

17 Hemant Beniwal

Thanks Tony
Must share TFL with your friends.

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18 Sagar

The HDFC Balanced Fund (G) has 55% portion in Equities.
So would it still qualify for Equity Fund? As you said the Equity % has to be greater than 65%.
So what will happen in this case?

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19 Hemant Beniwal

Hi Sagar,
I thin even HDFC balanced is having 65% in equity – can you share where you read it is 55%

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20 Parag

HI Hemant,

What is Tax implication of Equity MF Dividends for NRI investor ?

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21 Hemant Beniwal

Hi Parag,
Dividends from mutual funds – be it equity or debt are tax free in hand of investors including NRIs.
If you like TFL must share it with your friends :)

Reply

22 bibhuti singh

I have received money form ICICI prudential mutual fund on Maturity.
Please help me about their tax treatment.
Thanks and regards_
Bibhuti sningh

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23 ARAVIND. J

More data required

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24 meen

hi, how does one find out tax liability in case the liquid or debt fund is being used as feeder fund for stp s

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25 AmarendranathPatra

In my view switch is regarded as redemption and taxed accordingly either asSTCG or LTCG.

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26 Vivek

Hi Hemanth,
Enjoyed reading your article and learnt a lot about MF taxation. Thanks for sharing. However, I have a query: -
Would I be right in saying: In order to save tax, if I am investing in Debt MFs I should opt for dividend rather than growth option? The dividend income is tax free whereas capital gain is taxable.

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27 TAPAN

HI HEMANT.
I HAVE A SPECIFIC QUERRY REGARDING DIVIDEND REINVESTMENT OPTION IN DEBT FUND SPECIALLY REGARDING DIVIDEND STRIPPING.
CAN YOU CLARIFY REGARDING THE DIVIDEND STRIPPING CLAUSE OF DEBT MUTUAL FUNDS. IF YOU CAN EXPLAIN WITH AN EXAMPLE.
THANKS
TAPAN .

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28 Hemant Beniwal

Hi Tapan,
Dividend stripping is history now as MF can declare dividends only 5 days before the dividend date.

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29 TAPAN

hi hemant,
pl explain the provision of Sec 94(7) WITH a help of an example.
thanks
tapan.

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30 Sathya

Hi,

If i am investing in the HDFC Cash management fund treasury option- Daily dividend reinvestment would i be required to pay any tax?

My understanding is that what ever dividend is being given to me is not taxable. The dividend being reinvested will be treated like a fresh investment.
Since the NAV of this fund is constant @ 10.03 whenever i exit whether short term or long term there is going to be no taxation.

Please clarify.

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31 U Mahapatra

Thanks Mr Beniwal for the useful info in your article.

I have a query: What is “double indexation”?

Regards,
U Mahapatra

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32 Sreedhar

Hi,
I have invested in HDFC Prudence Fund Growth for SIP tenure of 3 years with last premium paid on August 2011. Now @ April 2012 if I wish to completely redeem, would it attract any TAX.

Reply

33 Vivek K

This fund comes under equity MF category so any gain from selling within a year of purchase will qualify for short term capital gain. Any gain from selling after one year of purchase will not attract any tax.

Based on the above whatever you purchased between Apr 2011 to Aug 2011 could attract 15% tax [applicable for STCG] if there any gain from selling those units. Better sell everything in Sep 2012 unless of course you need the money now.

Reply

34 Satya

Hi,
I invested in templeton India low duration debt fund with monthly dividend option.
From reading the blog I understand the dividend is tax free in my hands.
But after the dividend, the NAV of the fund fell. Now if I exit, I will have short term losses. Could you please explain what is the tax treatment for these short term losses?
Thank you,
Satya

Reply

35 Hemant Beniwal

Hi Satya,
Short Term Losses can be set off with short term or long term gains. (or can be carried forward for 8 years)

Reply

36 satya

Hi,
Thank you for your reply.
I will take an example (for above scenario).
If I buy the fund for Rs 10,000 and after 3 months receive dividend of 1,000. And at that point investment value became 9,500 (because of dividend NAV fell, and there ware some gains). If I sell at that point of time, will I be eligible for short term losses? – I am asking this as I get different opinions from different sources, so I wanted to reconfirm. Some one tells me, since I received dividend I need to account that also before claiming short term loses against that investment. In this case if I account for dividend, it will result in no short term losses.
Please let me know.
Satya

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37 Rajeev Srivastava

What abt an STP linked with a Liquid Fund? How these systematic transfers from Liquid fund to another equity fund will be taxed?

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38 Hemant Beniwal

Hi Rajesh,
Taxation will happen on 2 places
1st when your amount will move/switch from liquid – debt taxation will apply
2nd whenever you redeem equity – equity taxation will apply

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39 Gagan

Hi Hemnat,

I have invested 1 lac in reliance floating rate fund (Debt Fund), at time of redemption fund value was approx 1,09,700. But AMC has paid only approx 1,07,000.
On inquiry they straight away told me the NRI are subjected to 20.6% TDS deduction.
Is this information correct, are there any way i can ask for a return from Income tax. Because if i calculate with indexation, i am actually not making any gain. With indexation in place, value should be higher.

Pl reply & advise.

Gagan

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40 Hemant Beniwal

Hi Gagan,
This is correct that TDS is deducted in case of NRIs. But I don’t agree with this “f i calculate with indexation, i am actually not making any gain.”
You can take the refund if you are filling taxes in India.

Reply

41 Sreedhar

Hi,

Have query pertaining to ULIP insurance policy, wanted to know if I stop paying premium after 1st year. Policy fund value as on date get allocated debt account with annual compounded interest @ 4.5% and till end of lock in period of 5 years customer will not be able to withdraw money. If I wish to withdraw money after 5 years of lock in will it attract any TAX? pls clarify..

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42 Sreedhar

Hi Hemant,

Have query pertaining to ULIP insurance policy, wanted to know if I stop paying premium after 1st year. Policy fund value as on date get allocated debt account with annual compounded interest @ 4.5% and till end of lock in period of 5 years customer will not be able to withdraw money. If I wish to withdraw money after 5 years of lock in will it attract any TAX? pls clarify..

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43 Hemant Beniwal

Hi Sreedhar,
It will be tax free.

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44 mahesh

I have invested in a liquid fund with daily dividend reinvestment?Dividend is not taxable but if I sell the funds before one year-do I need to pay tax on the new units alloted based on daily reinvestments?
Further as at End Mar (Financial year) the MF house sends statement of one’s portfolio where they mention notional gain or loss-does one need to show that in one’s returns?
Lastly,if I am under 10% bracket why did my financial planner recommend me liquid fund daily reinvestments where the tax distribution by Fund house is close to 27%.Technically I lose 17% of my income-is that correct?

Reply

45 Hemant Beniwal

Hi Mahesh,
In first case answer is yes – you need to pay the tax on units that are created by reinvestment.
Regarding Second point – no need to show notional gains as this is not interest income.
For person who is in 10% tax slab – growth option is better.

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46 SUARABH GOEL

I had invested Rs.10000/- in TATA Young Citizen Fund in 1995 September and redeemed in Feb.2012 at value of RS.78000/-. Though it is a balanced fund by nature yet the maximum investment in equities as per Scheme details will not be more than 50%. Will the capital gains be subjected to TAX as applicable for debt funds or equity funds. The fund has not deducted any amount at source besides STT. Please advise. Regards Saurabh Goel

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47 Hemanth

Hi,
What about TAX for MF opted for SIP investment. Is it taxed according to what norms?

With Regards,
Hemanth

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48 Vikas

Hi Hemanth,

Every SIP installment is fresh purchase and so units bought on every installments will be taken for calculating LTCG or STCG.

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49 meen

What about gold mutual funds. How r they taxed? And what about intrrnational fof like dspgoldmine

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50 Hemant Beniwal

Hi Meen,
Gold funds & international funds are taxed like debt funds.

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51 meen

Even though international fof likr dsp goldmine are more then 65%equity,still they would be taxed as debt. Right hemant ji

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52 RK PHOPHALIA

What will be STT rate applicable on equity mutual fund at the time of redemption wef 1July12?will it be .25% or .2% due to changes in STT by budgetary/finance Act 2012 provisions.

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53 Venkatesh

I just read the above article. Even if the article is dated and the exact Tax rates have changed since this was written, this is still a fantastic article. Written very nice and clear. Many thanks.

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54 Sandeep Bhatia

Hi Hemant,
A nice article written in very simple language for people to understand. Have a question though..

I understand we can offset ST losses against ST Gains and LT gains. However LT gain for equity MFs in taxed 0, whereas LT gain on Debt MFs is chanrged 10% or 20% w/Index.

1) Can ST Gain/Loss from Equity MF be offset against LT Gain/Loss from Equity MF ? I guess the answer is YES
2) Can the Equity ST Gains/losses be offset against LT gains/loss from Debt funds ?

Regards
Sandeep

Reply

55 Vikas

Hi Sandeep,

Yes, short-term capital losses may be offset against both long term and short-term taxable capital gains. But long term losses can be offset only against taxable long term gains .

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56 PRaja

Hi Sandeep,
Let me venture to answer your twin queries.
But firstly there is no question of off setting a net ST gain or net LT gain. When there is a gain you have to pay tax as applicable.
For setting off loss in LT or ST, in a given year you can proceed like this: First sum up all your ST gains and losses in a year from various schemes and arrive at net loss or gain. Similarly sum up separately all LT gains and losses from various schemes and arrive at net loss or gain.
If there is a net gain pay tax ( ST or LT) as applicable.
If there is loss they can be carried over to the next year(s). While doing so ST and LT can not be mixed always. Carried over ST losses can be used for off setting against LT and ST gains in the next 8 years. But carried over LT losses can be used for off setting only LT gains.
Regards,
Raj.

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57 Ranjit Gupta

Hi Hemant,

I had opted for Dividend Re-investment Debt Mutual Fund on which Dividend Re-invested every weekly. What will be the Tax Treatment if i sold it after 1 year or before 1 year. Example, I purchase for Rs. 1,00,000/- and Total Dividend Re-investment is Rs. 40,000/- and i sold it for Rs. 1,50,000.

and 2nd thing i want to know is can we setoff Short Term Capital Loss of Debt Mutual Fund with Short Term Capital Gain of Equity Mutual Fund and Vice Versa.

Reply

58 Vikas

Dear Ranjit,

A dividend reinvestment is counted as a fresh purchase of units and so any gains earned on this reinvested units will be taxable as per the period of holding.

Yes you can set-off short term capital loss in debt funds with short term capital gains in equity funds.

Reply

59 KUMAR

Hi Hemant,

i am a regular investor thro on line .Many a times, if fund performance is not good, i will switch from one fund to another : for example from ICICI focussed bluechip to FMCG fund, then what is the Taxation applicable if again i switch back or switch/redeem( before 1 yr or after, both cases)

thanks in advance

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60 Hemant Beniwal

Hi Kumar,
Switch is considered as redemption.

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61 viral

i have invested in ICICI pru FMCG MF (growth option). Is long term capital gain on this fund is nil? If nil please clarify how it is nil.

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62 Vikas

Dear Viral,

The fund you have mentioned is an equity fund due to which LTCG is nil in the long term.

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63 AMIT JAISWAL

Hi all!
I have some queries regarding taxability of income from Mutual fund in hands of Corporate. The companies one of the main object in MOA is investment in Mutual fund. Whether its income form above fund is taxable under capital gain or PGBP?

Reply

64 Vikas

Dear Amit,

Yes, income from mutual fund will be taxed as capital gains when it is investments and not the major line of business.

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65 Haresh

hi
i have invested in Baroda Pioneer treasury Advantage Daily divident reinvestment-liquid plan ,So Divident is paid daily and reinvest daily

I have following question :
(1) Do i have to pay any short term or long term gain tax on it ?
(2) If i will show the above mutual fund in my tax return then how much tax should it deduct
(3) i am in 10% tax bracket, so which one should good for me either Daily divident reinvestment OR Groath Plane

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66 sunil

I desire reply of question as above mentioned on 63.

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67 Vikas

Hi Haresh,

You will have to pay tax only on the gains and not on dividend. So if you haven’t booked your profit after dividend reinvestment there is no tax liability yet.

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68 C.Maheshwar Reddy

Sir,
In the case of Mutual funds, when switching out from one fund another fund and after some time if that fund finally sold out, what would be the income tax liability for an NRI. All these happens within in a year time. Kindly clarify.

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69 Vikas

Hi,

You will have short term capital gains tax liability at every sell if its within one year.

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70 Ravichandran

Hi,
I invested Rs 30,000 in UTI Gilt Advantage Fund in October 2008 and redeemed for Rs 39,000 in August 2012. I have a LT gain of Rs 9000. However, the indexed cost is about Rs 43,900 resulting in capital loss. Can I take the indexation and consider that I incurred LT capital loss in the Debt fund and avoid paying tax? Pls advise.

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71 Vikas

Dear Mr.Ravichandra,

Indexation benefit is allowed in long term capital gains from debt funds and if it gives a capital loss then you do not have to pay any tax.

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72 S.Vaidyanathan

I was an NRI till March 12. Wile I was an NRI , I had invested in HDFC MIP Long Term Growth (Invested during financial year 2011-12) .

Want to know if this investment qualify for deduction from income (upto Rs 1 lac) under section 80 C ?

Reply

73 Hemant Beniwal

No

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74 Sunil

Dear Mr. Hemant,
Related to ULIP, i have invested 60,000/year in ICICI PRU PINNACLE for 3 years with a total amount paid as 1,80,000.
I have surrendered that and got an amount of 1,59,000 would be eligible to show that difference as Capital Gains Loss?

Reply

75 Vikas

Hi Sunil,

No, you cant show ULIP loss as capital gains.

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76 Deepta

Hi,

I am still a bit confused abt the taxations with regard to STPs from liquid or debt funds. I plan to increase my investments in my existing fund – UTI Opportunities, through a lump sum investment in UTI Liquid Cash Plan and start weekly STPs. Keeping in mind that these STPs will be done for a time frame of over a year, i have opted for the growth option in the liquid fund. I plan to duplicate this approach with other existing equity funds with HDFC & ICICI in the near future.
My question here is –
1) Do these weekly/monthly STPs attract STCGs as per my slab (30%)?
2) If yes, how do I minimize tax incurred during the STPs from the liquid fund? Will a dividend reinvestment option work out better in this case?
3) Would a short term debt fund be better for this purpose (of course, keeping in mind exit load & lock-in periods)?

Would appreciate any feedback. Thanks!

Reply

77 Vikas

Hi Deepta,

Any withdrawl from debt fund before one year will have short term gains and so the tax will be STCGT. You can reduce this by opting for dividend option which in your hands are tax free but company pay a DDT which is far lower. Its better to have the strategy from a liquid fund as some of your investment will have a very short period and short term funds are prone to interest rate risk to some extent.

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78 Nitasha

Sir
If being an HUF we have sold the property and the sale proceeds are invested in IDFC mutual fund whether dividend from that mutual fund would be taxable in our hand or not?

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79 Vikas

Hi Nitasha,

Dividends from Equity mutual funds are tax free for Individual or HUF. If its a debt fund the dividend will be paid by the company after deducting relevant DDT.In investors hand the taxability do not arises in either case.

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80 Vikas

Hi Nitasha,

Dividends from Mutual Fund are tax free in the hands of individual or HUF.

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81 Senthil Kumar

This article answered the questions I had regarding Mutual Funds and Taxes. It was clear and in unambiguous language. You also explained things in such an order that I didn’t have to read anything a second time to understand. Thank you for the excellent article and keep up the good work.

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82 Ramesh

Grateful if u could clarify the tax situation for the flwg situation :

Purchased hdfc cash management daily reinvestment 1000 @ 10.31 / unit in 2009
Have been regularly receiving dividend which was reinvested @ 10.31 until 2013
Total holdings (initial investment + dividends reinvested) in 2013 sold at 10.31/unit.

1. No tax on dividends reinvested ?
2. No capital gain on original investment as price of purchase and sale at same price. In fact could be a ltc loss if one uses indexing.
3. No capital gains on original on units bought from dividend received upto 12 months prior to sale as the acquisition and sale price same. As in point 2 could be ltc loss if indexed.
4. For units bought within twelve months of sale will attract dtc gain if there is a profit in the acquisition and sale price ?

Would greatly appreciate your response to above. Thanks in advance.

Reply

83 Vikas

Hi Ramesh,

1. For investor there is no tax on div- reinvested but there is already a dividend Distribution Tax which company has paid before distributing dividends.

2. Since you are receiving dividends, the capital appreciation will be negligible in your case.

3.The taxability of gain will arise in this investment even if it is after a year period since its a debt mutual funds scheme.

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84 ian pinto

hi hemant,
i have invested 52 lakhs in equity mf’s over the last 10yrs. the last investments were in 2008. i have redeemed all mf’s in jan 2013. i know there is no long term tax applicable. could you enlighten me about tax through indexation if applicable?

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85 Vikas

Hi Ian,

Firstly there is no taxation on gains from equity mutual funds and so Indexation will not apply.
However for knowledge, in Indexation benefit the cost of purchase of mutual funds is indexed with use of Cost Inflation Index and then the gain is computed. Through this means you are able to adjust your cost with inflation.
Read This to know more on CII:

http://www.tflguide.com/2013/09/cost-inflation-index-cii-how-it-impacts-capital-gain-tax-on-real-estate-mutual-funds.html

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86 Karry

Hi ,

I have a question could mutual fund can be used as tax saving instrument like (ppf,5 YR lock FD). I heard about a new rule of mutual fund for new investor upto 50000rs investor can show as tax saving investment and lower down their taxable income .

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87 Vikas

Hi Karry,

There are specific mutual funds schemes for availing tax benefit under Section 80C. These are termed as ELSS (Equity Linked Savings Schemes) which carry a three year lockin. The other option which you have mentioned is Rajiv Gandhi Equity Savings Schemes where by investing Maximum Rs 50000 you can avail tax deduction from your income for 50% of the invested amount i.e. max Rs 25000. This benefit is over and above sec 80C but the scheme has certain conditions which need to be fulfilled to avail the tax benefit.

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88 R C AGRAWAL

I HAVE INVESTED IN HDFC PRUDENCE DIVIDENDED REIVESTMENT IN YEAR 2008 RS 50000 NOW I WANT TO SELL IT WHAT WILL TAX LIBILITY ON DIVENDED REINVESTMENT PLAN

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89 Vikas

Dear Mr. Agarwal,

When you invest through a dividend reinvestment option, every dividend reinvested is counted as fresh investment and from the date of its investment your gains will be computed for the respective units. So any dividend reinvested has not completed one year, the gains on this particular units alloted to you will be short term capital gains.
I hope it answer your query.

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90 Sunder

Hello,

I hold few foreign mutual fund (all of them are US based). I am living in India for last 8 years and US Citizen. How do I treat the Dividends & Dividend reinvestment from foreign mutual funds?

Thank You
Sun

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91 Ravi

I am NRI, One and half year ago I invested into debt fund and recently I have taken the redemption in debt category fund, and AMC had cut the TDS of 20% while I was thinking that TDS to be cut after adjusting the indexation. when I contacted the AMC they have on answer for that.pls. assist

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92 Guna

I have been a regular reader of this blog since Jan 2012 and I have read every article. I had started investing in MFs after this and I must say that it has been fruitful in inculcating the habit of SIP, asset allocation and portfolio readjustment . The best has been not to fall prey to insurance sellers. On a recent occasion a chartered accountant who was an insurance agent tried hard to sell it to me. In fact, it is a habit to re-read all the old articles on a leisurely saturday /sunday every 4-5 months just to retain the knowledge. For that I must thank Mr. Beniwal and others for taking time and writing so well on so many issues.

I was switching from a SBI debt fund to liquid fund and I had this nagging doubt. I mailed SBI. They replied that they dont charge any exit load for the switch. But they suggested to check on capital gain else where.

I was hoping that Mr. Beniwal would write an article on taxationand exit loads when you switch within a fund house like from a debt fund / liquid to equity or vice versa or to any other fund categories when you want to balance the portfolio. …. and as to how to obtain a capital gains statement for IT calculation purposes. I tried to find answer to this in other websites too and nobody seemed to say anything about this.

Thank you and keep up the good work

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93 P G HARIKUMAR

I am a salaried employee paying tax. My employer deducts TDS from my salary. I Invested Rs. 1 Lakh in a debt fund and withdrwan Rs. 101000. after one month thereby gaining Rs. 1000. AMC did not deduct any TDS. As per the this page I have to add this amount to my income. How to do it? Whether I need to pay advance tax or I have to declare it during filing of return and pay remaining tax at that time?

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94 Neeraj Srivastava

Hi Hemant,

1. I have redeemed one of my mutual fund investment (inception date – 12/01/2010) on 3-Apr-13. The amount is 28184.93
2. Also I have got dividend from another mutual fund investment on 13-Mar-2014. The amount is 2998.12
3. I had an ULIP policy with inception date as 28 sep-2009. I have paid this regularly with last payment in sep 2012. I have surrendered the policy on 23/08/2013. Minimum term for policy payment was 3 years. The amount received was 95,679.34
I want to know for 1st and 3rd point where should I mention this amount. Wether this will be taxable amount of non taxable amount?
I will be greatful if you could share your input on this.

Regards,
Neeraj Srivastava

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95 rajal patel

Is indexation apply on debt mutual fund with dividend option for long term investment ? (> 1 year). If yes, how to account for div. received while calculating gain/loss?

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96 Rsr

Why indexation benefit is given to debt funds and not to Bank deposits?

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97 Govind

Dear Hemant

I had invested in short term debt mutual funds for a period less than a year in FY 13-14. These were the dividend reinvestment type. I redeemed them within a year. My questions are:
1. Since the MF has paid DDT, how is the dividend treated for tax in my hands?
2. Do I show the dividend income as Exempt income in ITR?If not, where in the ITR?
3. Can you quote the exact IT section(s) covering this?
Grateful
Govind

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