Managing taxes have always gained importance at all times. So naturally, knowing about tax implications on mutual funds is also important. Efficient Tax Planning is the key to wealth protection and wealth creation as well. We all pay taxes on our gains. Be it salary or income on interest or any other income, all lies under some or the other tax slab. When no income remains untaxed how can gains on mutual funds be free from tax?

Better known as capital gains, earnings on mutual funds are taxed. There is a separate procedure for computing taxes on mutual funds.

The difference between market value of mutual fund at the time of buying and value of mf at the time of selling is known as capital gain, or in simplified words, it can be defined as the earnings on selling an investment. Depending upon the tenure it can be long term or short term. More the appreciation of NAV more will be the returns in the funds you have invested.

Tax on capital gain is called as capital gain tax. The most unanswered question is how this tax applies to equity? So here is an attempt to answer the question.

Equity-Tax Relation

The tax on capital for equity and equity-oriented funds has simple implications. The period of more than a year, i.e., 12 months is tax-free for equity investments because there is no tax on equity mutual funds for long-term investments. For period less than 12 months, i.e. short term, an investor is required to pay 15 percent tax on its gain value (Purchase cost- Sale cost). A negligible amount of securities transaction tax is applied to every equity scheme’s redemption.

Equity-oriented balanced funds, arbitrage funds, and equity savings funds also come in the tax-free category in long term, just like equity funds. Similarly, as equity funds, these funds are also taxed at 15 percent for a period less than one year. Irrespective of receivable time, dividends on equity are free from tax whether it is long term or short term. The fund of funds and an international fund do not get the benefits of tax as they do not match the specifications of Tax Laws.

How can you save your mutual funds from tax implications?

  1. Invest for a Longer Period: The simplest way of avoiding tax liabilities on capital gain is to invest for a longer term, i.e 1yr or more. There is no tax liability on investments made for more than one year.
  2. Avoid Early Redemptions: Avoid redemption of the equity investment before one year. If you take back an investment before a year, you will be liable to pay a tax liability of up to 15%. If you have early redemption goals, then choose to invest in debt funds.
  3. Earn from Dividends: Dividends on equity funds are free from capital gain taxes, irrespective of the time they are paid off. You can enjoy the tax-free dividends at all time without bothering about investments.
  4. Tax-free Equity Fund: ELSS (Equity Linked Savings Scheme) is a tax-free fund. An investor can save up to Rs. 1.5 Lakh from his taxable income under Section 80C of income tax act with a lock-in period of 3 years.

So, we conclude from this article that no income is tax-free, there are taxes that apply to mutual funds also. On the capital gains, there are separate taxes applicable, but efficient tax planning for equity mutual fund can save an investor from paying taxes.

The article tells about the implication of taxes on equity mutual funds, it also explains about the efficient tax planning for equity funds.

Author's Bio: 

Dishika holds deeper knowledge in finance with the experience of working with top mutual fund houses in India. Presently, the author is associated with MySIPonline for providing the online mutual fund investment services to their clients.