The taxation of mutual funds other than equity funds have undergone a major change in taxation that has been brought about by the Budget 2014. As per the Finance Bill, that has just been given a green signal, non-equity mutual funds would be taxed at 20% as compared with the earlier rate of 10% (without indexation) and 20% (with indexation).
Non-equity mutual funds, which include debt funds, monthly income plans, international funds, gold funds, fund of fund scheme, are the investments on which one can claim indexation benefits. Indexation is nothing by adjusting investments for inflation during the period a person remained invested.
This adjustment often helped investors, especially those investing in Fixed Maturity Plans (FMPs), to reduce the tax applicable to nil as the gains were set off against inflation. Though these are similar to the fixed deposits (FDs) offered by banks, except for the fixed nature if returns, indexation isn’t permitted on FDs. The taxation structure prior to Budget 2014 was favourable for debt mutual fund investors.
The tax differences have been fixed by increasing the tax rate applicable to debt scheme.
Another blow has been that the timeline for investments into non-equity Mutual Funds to be qualified as long-term has been stretched to 36 months from 12 months earlier.
The indexation benefit was earlier available for FMPs maturing even a few days after a year as the maturity dates were placed in different financial year. This indexation benefit would now be available only on FMPs maturing after 36 months.
Those redeeming funds from non-equity funds before 36 months would have to pay tax as per their bracket as the gains are added to their income. In fact, if we take into account the surcharge, then the rate applicable to debt funds is higher than that charged to non-resident Indians – 48%.
But as an exception, the maturities of non-equity mutual funds only after July 10, would be subject to higher taxation, as the Budget was presented in July this year.
So, to escape high taxes stay put until you complete 36 months since you invested or roll-over the maturating investment for another cycle.
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