The time for savings is way in the past; today’s the day and age of investment. Various investment options are available for individuals to enjoy capital appreciation. One such lucrative option is mutualfunds online; however, there are tax implications involved with such an investment. But, before we understand taxation on such funds, it is vital to know the types of holding periods – the period over which investors stay invested in an MF scheme – something which plays a crucial role in determining how these funds are taxed.
| Types of mutual funds | Short-term holding period | Long-term holding period |
| Equity funds | Less than 12 months | 12 months and more |
| Equity-oriented balanced funds | Less than 12 months | 12 months and more |
| Debt-oriented balanced funds | Less than 36 months | 36 months and more |
| Debt funds | Less than 36 months | 36 months and more |
Tax implications of mutual funds
- Equity funds
The tax implications for both regular equity and tax saving mutual funds are the same. If the capital gains exceed Rs. 1 lakh in a year, Long-Term Capital Gains or LTCG tax is applicable on such funds at the rate of 10%; plus, there are no indexation benefits in this case (Indexation is a method of taking into consideration inflation from the time of purchase to the time of sale of units). However, there is one slight difference between regular and tax saver or ELSS equity funds – in terms of the lock-in period. The latter comes with a lock-in period of three years; hence, funds redemption can only be made once the said period has ended.
- Debt funds
When it comes to debt funds, long-term capital gains are taxed at the rate of 20% after indexation. On the other hand, short-term capital gains on debt funds are added to the income and then taxed according to the income slab the investor falls under – 5%, 20%, or 30%.
- Balanced funds
The tax implications on balanced funds are dependent upon the level of equity exposure. As such, hybrid mutual funds that are equity-oriented are taxed like any other equity fund, whereas hybrid funds that are debt-oriented are taxed like any other debt fund.
- Systematic Investment Plans
Systematic Investment Plan or SIP is a method of investment under MFs. Under such a method, investors can invest a small sum of money on a periodic basis and are free to choose the frequency of their investments – weekly, monthly, quarterly, bi-annually, or annually. Now, the taxation on Systematic Investment Plans is done on a pro-rata basis – each investment made under this method attracts taxes on capital gains separately.
- Securities Transaction Tax (STT)
Another type of tax known as the Securities Transaction Tax or STT is levied at the rate of 0.001% by the Ministry of Finance. This tax is levied at the time of selling units of equity or hybrid equity-oriented funds. No STT is levied at the time of selling debt funds.
The truth is mutual funds online are more tax-efficient when compared to other modes of traditional investments. And the longer you stay, the more profits you may earn. So, if you’re planning to invest in MFs, go ahead by all means. It is now possible for you to compare schemes using apps and start investing online, without much hassle. Make the most of this investment product and let your money work for you!
