How Equity Funds Are Taxed?

The basic goal of any investment is to make money out of it. Mutual funds are taxed when they are sold. The profit/Gain portion of the sales is considered as capital gain. Thus, Investing in mutual funds generates capital gains. Tax is calculated on these Capital Gains only. In this article, we will explore the taxation of equity mutual funds.

Taxation of Equity Mutual Funds

Taxation of Equity Mutual Funds
  • Equity mutual funds are mutual funds, which primarily invest in stocks to get the benefit from rising stock prices in the capital market.
  • Funds where equity holding is more than 65% of the total portfolio are classified as equity funds for taxation.
  • The returns on equity mutual funds are in the form of dividends as well as capital gains.
  • Capital gains are of 2 types :
  1. Short-Term Capital Gain (STCG)
  2. Long-Term Capital Gains (LTCG)

Short-Term Capital Gain

When the equity oriented mutual funds are sold within 12 months from the date of purchase, it results into the Short Term Capital Gain/ Loss. Short term capital gain is taxed @ of 15%.

  • For Example:
  • Mr. A has purchased 100 units of IDFC value fund, for Rs. 400 per unit, in January 2018. He sold these 100 units on August 2018. What will be the tax implication of capital gains in such case? NAV on date of sale was Rs. 450
Calculation of Short-Term Capital Gain
  • Solution-
  • Mr.A has held the Mutual fund units for a limited period of 8 months, thus he will be liable for payment of STCG (Short-Term Capital Gain) on sale of such listed shares (the capital asset in this question).

Long-Term Capital Gains

  • Till FY 2017-18 Equity-oriented funds had no tax on long-term capital gains; But things have changed after budget of 2018.
  • Finance minister introduced the long-term capital gains tax (LTCG) of 10 % on Equity MF on gains of over ₹1 lakh per annum without allowing the benefit of indexation.
  • If you have long term gains/profits before 31st Jan 2018, then you don’t have to pay taxes on them.
  • Example1
  • Ms. Harsha has sold the units of MF and has earned the LTCG of Rs. 1,10,000. In such case the LTCG shall be liable to tax at the rate of 10% (without indexation benefit).
  • Now, LTCG Tax is applicable on the amount exceeding Rs. 1,00,000. Hence, LTCG Tax is to be paid on Rs. 10,000 and NOT Rs. 1,10,000)
  • Example2: Computation of LTCG
  • Mr. Janak has purchased the units of ABC Equity Fund for Rs. 10,000 and sold for Rs. 12,000. The FMV as on 31st January 2018 is Rs. 11,000. Determine the taxability of Long Term Capital Gain under different scenarios.
Computation of Long-Term Capital Gain under Different Scenarios

Dividend distribution Tax

From FY 2018-19, AMC will have to pay 11.64% tax on dividends from an equity-oriented MF on investors behalf. Earlier, there was no DDT on Equity MF. This DDT is from the profits made by Equity Funds in other words which means it is reduced from the ‘in hand’ returns of the investor.

ELSS or Tax Savings Mutual Funds

ELSS is a type of diversified equity mutual fund. Person can claim 80C deduction of amount invested in ELSS (but maximum upto Rs1.5 lakhs). But this mutual fund has a 3yrs lock-in period. Earlier there was no tax on sale of ELSS but after the introduction of LTCG tax in budget 2018, LTCG will be taxed @ of 10 % if gain exceeds Rs.1 lakh

STT- Securities Transaction Tax (STT) is a type of direct tax. It is governed by STT Act. It is payable on the value of transactions transacted on NSE or BSE.

RELEVANT TERMS

Let us understand the basic terms used in computation of Capital Gain. For more details Referhttps://taxyadnya.in/

i) Cost of Acquisition (COA) (For calculation of LTCG on sale of mutual funds):

  • If equity mutual fund held for less than 12 months (short term assets) – Actual purchase price
  • If equity mutual fund held for 12 months or more (long term assets)-
  • Here, we need to follow a Two Step process-
  • Step 1 – Find Lower of Fair Market Value (FMV as on 31st January 2018) and SALE PRICE
  • Step 2 – Higher of the actual COA and Answer in Step 1

ii) Sale Price / Redemption amount:It is the price at which mutual fund units are sold.

iii) Computation of Capital Gains in such case: LTCG = Sale price – COA