The asset under management of Indian mutual fund industry has grown from Rs 5.87 lakh crore as on 31st March, 2012 to Rs 21.41 lakh crore as on 31st October, 2017 - about three and half fold increase in a span of about 5 and a half years. Driving this growth is over Rs 5,000 crore inflows coming in from retail investors every month through SIPs or systematic investment plans, which are investment plan offered by mutual funds, wherein one could invest a fixed amount in a mutual fund scheme at fixed intervals.
Income Tax Rules On Mutual Fund Gains Explained In 10 Points
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.
2) Apart from equity diversified funds, arbitrage funds are also considered equity funds. Arbitrage funds invest in equity and derivatives such as futures and options while equity income funds invest in a mix of equity, equity derivatives and debt. If a balanced fund invests minimum 65 per cent in equities, it is considered an equity fund for tax purpose.
3) 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.
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.
7) Currently, the long-term capital gain on debt funds is taxed at the rate of 20 per cent. However, investors get the benefit of indexation on their original debt fund investment. This means that the original investment is adjusted for the price of inflation and taxed accordingly. Since the original cost of investment goes up after factoring in inflation, long term capital gains tax comes to negligible levels.
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.