Income Tax on Mutual Funds Gains - Long term and Short term

The tax you need to pay on your Mutual fund investments relies on the kind of fund you've invested and how long you hold it.

At the point when you redeem your investments at a benefit, you acquire capital gains. A capital gain is the difference between the price at which an investor purchased the units of a mutual fund scheme and the price at which he/she sold or redeemed them.

For example: in the event that you invested Rs. 50,000 out of a fund and it developed to Rs. 75,000 when you redeemed, Rs. 25,000 is the capital gain.

The current taxation rules partition capital gains into two distinct basins, in view of the span in which these were generated - Long term Capital Gains (LTCG) and Short Term capital gains (STCG).

The meaning of what span is long term and short term and what amount taxes you pay depends on the fund type you invested in.

Equity-oriented schemes: Schemes which put over 65% in stocks

Short term capital gain Tax

On the off chance that you sell your interest in equity funds inside a year, the gains on selling them are treated as short-term capital gains (STCG) and taxed at 15%.

For example: if your capital gains inside a year were Rs. 50,000, you should pay Rs. 7,500 as tax (15% of Rs. 50,000).

Long term capital gain Tax

Any capital gains from equity mutual funds held for more than a year are treated as Long term capital gains and you need to pay 10% tax if those capital gains surpass 1 lakh in a financial year. And still, at the end of the day you pay 10% on the amount which is in abundance of the Rs. 1 lakh limit.

For example: if your capital gains in the year were Rs. 1.1 lakh, you should pay Rs. 1,000 as tax (10% of Rs. 10,000).

Non-Equity Oriented schemes: Schemes which put under 65% in stocks

Short term capital gain Tax

In the event that you sell your debt/or non-equity oriented mutual fund schemes inside three years, the gains on selling them are treated as short-term capital gains (STCG) and taxed according to the Income tax slab rate.

For example:

Mr. Raj is in the 30% income tax section and invested Rs. 2 lakhs in a debt fund. Following two years, he took out the money and his redemption value was Rs. 2.5 lakhs.

Since the fund held for under three years (3 years), gains acknowledged from this procedure will be treated as short term capital gain and hence this will be added to taxable income and he should pay according to income tax slab that is 15,000 (30% of Rs 50,000).

Long term capital gain Tax

Gains acknowledged from debt mutual funds are treated as Long term capital gain if investments are held for over three years. The long term capital gain is taxed at 20% subsequent to giving the indexation benefits on cost.

Indexation

What's Indexation: It encourages you to change the purchase price of a debt fund to mirror the effect of inflation on it. This change builds your purchase price and along these lines decreases the gains, which viably implies lower tax.

For example:

Assume Raj remained invested for over 3 years in a Debt fund, Then following 3 years in 2018, he took out the money and his redemption value was Rs 2,50,000. Since he has sold it following 3 years, the gain is long term and a tax of 20% with indexation will apply.