The tax rules for mutual funds have changed over the past few years. Equity funds, debt funds, hybrid schemes, ELSS, and REITs/InvITs have different tax rules. It is important for taxpayers to understand these rules.
Add informalnewz.com as a Preferred Source
Interest in mutual funds has increased. Instead of keeping money in bank fixed deposits, people are investing in mutual fund schemes through SIPs. However, many investors are unaware of the tax regulations on mutual funds, which directly impacts their returns. Different mutual fund schemes have different tax regulations. Investors should be fully aware of the tax regulations before investing in mutual fund schemes.
Changes in Tax Regulations Over the Years
The tax regulations for mutual funds have changed over the past few years. Equity funds, debt funds, hybrid schemes, ELSS, and REITs/InvITs have different tax regulations. Rajesh Gandhi, Partner, Deloitte India, said, “The tax treatment of mutual funds in India depends on three factors: the type of investor (resident individual/HUF, non-resident or domestic company), the composition of the scheme’s portfolio (equity, debt or other assets) and the holding period of the investment.”
Tax Rules Based on Equity Allocation
He said that investors investing in equity, debt, hybrid, gold, or international funds must first consider the asset allocation of the scheme. This is because tax rules depend on how much of a scheme’s investment is in a particular type of asset. Some mutual fund schemes have simpler tax rules than others.
Tax Rules for Equity Mutual Funds
Equity mutual funds and equity exchange-traded funds (ETFs) invest at least 65% in shares of listed companies. Long-term capital gains (LTCG) rules apply to investments held in these funds for more than 12 months. LTCG is taxed at a rate of 12.5%. However, LTCG up to ₹1.25 lakh in a financial year is tax-free. Short-term capital gains (STCG) applies to investments held for less than 12 months, and is taxed at a rate of 20%. Grandfathering benefits are available for investments made on or before January 31, 2028. In such cases, gains till that date are not taxed.
Tax Rules for ELSS
Equity Linked Savings Scheme (ELSS) refers to a mutual fund scheme that offers tax benefits upon investment. Taxpayers using the old income tax scheme can claim deduction under Section 80C on investments in ELSS. Its tax rules are similar to those for equity schemes. LTCG is applicable if sold after 12 months. STCG is applicable if sold before 12 months. A major difference is that ELSS has a lock-in period of 3 years. This means that investors can withdraw their funds only after three years of investment.
Tax Rules for Debt Mutual Funds
Tax rules for debt mutual funds are different. Investing in debt funds on or after April 1, 2023, is taxed differently. Investing in debt funds before April 1, 2023, is taxed differently. Capital gains on investments made on or after April 1, 2023, are considered short-term capital gains and are taxed according to the investor’s income tax slab, regardless of whether the units are sold before or after 12 months.
Investments in debt funds made before April 1, 2023, are subject to LTCG and STCG rules. Withdrawals after 12 months are subject to long-term capital gains rules, which are taxed at 12.5%. Sale before 12 months results in STCG, which is taxed according to the investor’s tax slab.
Tax Rules for Hybrid Funds
Hybrid funds are taxed according to their equity allocation. If a hybrid fund invests 65% or more in equities (shares), the tax rules for equity funds apply. If the allocation to equity is less than 35%, the tax rules for debt funds apply. Such funds fall under the category of specified mutual funds. With a 35% to 65% equity allocation, LTCG is taxed at 12.5%, while STCG is taxed at the slab rate.
Tax Rules for Gold ETFs, International Funds, and FoFs
Gold ETFs, Silver ETFs, International Funds, and most fund of funds that invest less than 65% in equities are taxed at 12.5% on LTCG and at the slab rate on short-term capital gains (STCG).
Gandhi stated that if the investment in listed shares exceeds 65%, the taxation rules will be similar to those for equity funds. This means that long-term gains will be taxed at 12.5%. Short-term gains will be taxed at 20%. LTCG will be taxable only if it exceeds ₹1.25 lakh in a financial year.
He stated that if a scheme invests more than 65% in debt/money market instruments or 65% or more in another fund that itself invests 65% or more in debt, the scheme will fall under the category of a specified mutual fund. In such cases, the gains are considered short-term gains and are taxed at the fixed tax rate/slab rate. In such cases, the benefits of long-term capital gains are not available.
Read More: Dubai School Admission Age Rules Change: Admission age changed for FS1, FS2 and KG, check here
