Mutual funds are attracting inflows of nearly Rs 5,000 crore every month through SIPs or systematic investment plans. SIPs are an investment plan offered by mutual funds, wherein one could invest a fixed amount in a mutual fund scheme at fixed intervals. The funds under management of Indian mutual fund industry have touched a record high of Rs. 20 lakh crore, driven by strong inflows into both debt and equity segments. Financial planners say that SIP, instead of lump-sum, should be the preferred investment method in diversified equity mutual funds. Besides being able to invest a small sum of money, SIP helps an investor take benefit of the volatility in the stock markets.
10 Things To Know About Tax Implications On Mutual Fund Investments
1) For tax purposes, a mutual fund scheme that invests 65 per cent or more of its portfolio in equities or equity-related instruments, is considered equity funds. Apart from equity diversified funds, arbitrage funds are also considered equity funds. Arbitrage funds invest in equity and derivatives such as futures and options. If a balanced fund invests minimum 65 per cent in equities, it is considered as equity fund for tax purpose. Equity-linked savings schemes (ELSS), which are also known as tax-saving mutual fund schemes, are also equity funds.
2) Any gain for equity mutual fund units (SIP or lumpsum) held for more than 12 months is considered as a long-term capital gain. There is no tax on long-term capital gains from equity funds. From a taxation perspective, each SIP instalment is considered a separate investment and must be held for at least a year to be eligible for the long-term capital gains benefit.
3) Remember that only investments in equity-linked savings schemes (ELSS), which are also known as tax-saving mutual fund schemes, qualify for a tax deduction of up to Rs 1.5 lakh under Section 80C. ELSS schemes have a lock-in period of three years.
4) For periods less than 12 months, short-term capital gains tax is applicable at 15 per cent on the gains from equity funds.
5) Many investors opt for dividend option while investing in equity mutual funds. Dividend income from equity mutual funds is tax-free, irrespective of when you receive it.
6) Investments in debt funds are considered long term only if they are held for more than three years.
8) But if debt mutual fund investments are redeemed or sold before three years, the short-term gains are taxed according to your tax slab.
9) Income from debt funds also come in the form of dividends. Any dividend declared by a debt mutual fund is exempt from tax in the hands of investors.
10) However, mutual fund houses pay dividend distribution tax @ rate of 28.84 per cent (including surcharge and cess) before handing out the dividends to investors.