Investors can get returns from mutual funds investments in the form of dividends or capital gains.
Mutual Funds investors receive dividends if they have taken up a scheme with a dividend payout option. Dividends are taxed as per the income tax slab they fit in after adding them to one’s overall income.
The investor gets returns in the form of capital gains when they sell the mutual funds units at a NAV price greater than the purchase price. Let’s understand the tax liability on capital gains for different types of asset classes.
Any fund which has more than 65% invested in equity. For example, small-cap funds, large-cap funds, balanced funds (equity-oriented), etc.
Mutual Funds units that are sold after 1 year are categorized as long-term investments and taxed as per long-term capital gain tax rules. After consolidating all the long-term gains from capital markets, up to ₹1 lakh is exempted and the remaining is taxed as per the Income Tax Act. Currently, it's taxed at 10%.
Mutual Funds units that are sold before 1 year are categorized as short-term investments and are taxed as per short-term capital gains tax rules.
Funds whose equity investment percentage is less than 65%. e.g.liquid schemes, debt schemes etc.
Indexation means adjusting the cost of purchase as per the inflation index number which is released by the government every year. Let's say, you purchased a unit at ₹50 in 2012-13 and sold the unit at ₹100 in 2018-19. And, the cost inflation index is 200 for the period 2012-13 and 280 for the period 2018-19 respectively. Then, the indexed cost of acquisition (50*280)/200 is ₹70.
The capital gains post indexation is ₹ (100 - 70) = ₹30 (instead of ₹100 - ₹50). So, a 20% tax will be applied on this new capital gain adjusted post indexation.
In both cases, the capital loss cannot be balanced against any income head.
Long-term capital loss can only be offset against long-term capital gains.
Short-term capital loss can be offset against both short-term or long-term capital gains.
Note: The information above is applicable under the current taxation rules and could be subject to changes. Do consult a chartered accountant (CA) before filing your IT returns. For more information click here.