Though many consider tax benefits while investing in a scheme for Section 80C gains, they forget to assess the taxability of the gains upon redemption or withdrawal. There are various mutual fund schemes available and they invest across asset classes such as equity (stocks), debt (bond, money market, commercial papers etc) or gold. The taxability of the units on withdrawal would vary according to the asset class it invests in.
Much has been talked about the taxation benefits on the amount invested in mutual funds through equity-linked savings schemes (ELSS) and the freshly-launched Rajiv Gandhi Equity Savings Scheme for first time investors in the stock markets. But once you redeem the mutual fund units, or you receive other payments such as dividends and monthly income, are you supposed to pay any tax? We shall discuss here, the tax implications on your mutual fund investments upon withdrawal.
Just like dividends from shares, dividends received from equity mutual fund units don’t attract any tax once in your hands. Though no tax is applicable to you for equity funds, debt funds such as liquid fund, money market funds etc, paying a dividend are subjected to Dividend Distribution Tax. You need not pay this tax separately as the fund house deducts the tax at the rate of 28.325% before paying out the dividend.
Profits from MFs:
If you hold your equity mutual fund units for more than a year, then you won’t have to bear the brunt of taxation. But in a step that discourages early sell-off units sold within a year attract a 15% tax of the total gain.
Under debt funds one has the option to adjust the purchase price in line with the inflation for the period. This adjustment for inflation is called indexation. However, you are allowed to claim indexation benefits only on funds held for more than three years. There are two tax rates applicable on claiming gains for debt funds based on the period you hold the units. If you hold them for more than three years then you have to pay a tax of 20% on the gains, which are indexed (inflating the purchase price for inflation). However, if you withdraw from a debt fund within a year then the gain is added to your income and taxed according to your tax bracket. Also, termed as short-term capital gains tax it can be levied at 10-20 or 30% based on your tax bracket and no adjustment for inflation is possible, since annual value inflation is taken into account.
While hoarding physical gold attracts wealth tax, gold held through Mutual Fund Exchange Traded Funds (ETFs) is not liable to wealth tax. This is simply because gold is held in demat form. Also, the Finance Minister has weeded out wealth tax starting financial year 2015-16, instead applying a surcharge on the super rich.
Securities transaction tax:
When you switch from one fund to another or redeem your mutual fund units completely, the fund manager is forced to see the stocks held to the extent of your amount. Securities transaction tax is applicable on selling shares each and everytime. This STT at the rate of 0.001% is applicable on withdrawal and fund switches only on equity funds. This is levied on the value of taxable securities transactions.
If you are a resident Indian then the fund house never deducts taxes at source (TDS). Non-resident Indians are paid the gains or dividends post deduction of TDS. A lower rate is applicable to NRIs in countries where India has double taxation avoidance agreement. To claim the benefit the unit holder will have to submit a certificate from the assessing officer to ensure that the fund house deducts taxes at a lower rate.
Now that we have understood the way taxation works on gains in mutual funds, let us also look at how losses booked on mutual fund schemes are treated. The Income Tax Act permits one to set off losses against gains made from investments. But you can’t adjust losses against any and every income or gain made. Here are some pointers to help you carry forward of adjust losses made in mutual funds:
A. You cannot deduct the capital loss against salaries or other income.
B. Short-term capital loss can be set off only against short-term or long-term capital gain.
C. Long-term capital loss can be set off only against long-term capital gain
D. One cannot set off long-term capital loss on equity funds against long-term capital gain on equity funds as this gain is exempt.
E. To avoid tax avoidance using the dividend option of a scheme, setting off losses is not allowed if an investor invests within three months before the dividend record date and sells units before completing nine months from the dividend record date.
F. The same time line is applicable for tax avoidance in lieu of NAV reduction due to bonus unit declaration. One cannot set off losses incurred on selling units of a scheme purchased within 3 months prior to bonus record date and sold within 9 months after the bonus record date.