Mutual Fund Taxation Rules for FY 2018-19

Profit that you make by selling or redeeming units of mutual funds is referred as Capital Gain. It can be further classified as Short Term Capital Gain (STCG) or Long Term Capital Gain (LTCG) depending upon the holding period. Capital gain is the difference between the market value of your mutual fund units at the time of sale and the cost of such units at the time of purchase. The gains come in from the appreciation in your fund’s NAV. Tax applicable to the profit made from mutual funds is known as "Capital Gain Tax".

Factors that determine the Mutual Fund taxation are described below.

1. Residential Status

You will be taxed based on your residential status. Taxation rules are different for "Non-Resident Indian" (NRI) and "Resident Indian". For NRI, tax is deducted at source (TDS). For residents, no tax is deducted at the source and individual is responsible to pay tax on the capital gains made.

2. Type of Fund (Equity or non-equity fund)

Any fund that invests at least 65% in equity is known as equity fund. For example, Large cap funds, multi cap funds, small and mid cap funds, equity oriented balanced funds.

If the equity portion is less than 65% in equity then they are treated as non-equity funds. For example, debt funds, liquid funds, ultra short term funds, short term funds, gilt funds, dynamic funds, debt oriented balanced funds, fund of funds or money market funds.

International or global funds that invests in market such as US or Europe, other then domestic market may not qualify as an equity fund. By law, it mandatory to have 65% in domestic market. Similarly, fund of funds does not qualify for an equity fund as it does not directly hold stocks or equity, they hold units of other funds.
   

3. Holding Period of investment

Holding period of your investment for taxation is different for equity and non-equity funds. It can be classified as Long term capital gain (LTCG) or Short term capital gain (STCG).

• Long Term Capital Gains
• For Equity funds, if you make any profit by selling units that you have held for more than 1 year will be classified as long term capital gain.
• For Non-Equity funds, if you make any profit by selling units that you held for more than 3 years will be classified as long term capital gain.
• Short Term Capital Gains
• For Equity funds, if you make any profit by selling units that you have held for less than 1 year will be classified as short term capital gain.
• For Non-Equity funds, if you make any profit by selling units that you have held for less than 3 years will be classified as short term capital gain.

Table for Taxation rules for both Resident Indian and NRI

	STCG	LTCG
Equity Fund	MF uints held for one year or less	MF uints held for more than one year
Non-Equity Fund	MF uints held for three year or less	MF uints held for more than three year

Capital Gain Tax Rate for Resident Indian

• Tax Rate for Resident Indians
  
  

  	STCG	LTCG
  Equity Fund	15%	Earlier it was NIL but after budget for FY 2018-19 it is 10% if capital gain is more than  Rs. 1 lakh (without indexation)
  Non-Equity Fund	As per individual tax slab	20% (with indexation)

• No TDS is deducted and individual need to pay tax while filling ITR.

Capital Gain Tax Rate for NRI

• Tax Rate applicable for NRI is same as that of Resident Indians but TDS is deducted for them. Tax rate applicable is shown in below table.
  
  

  	STCG	LTCG
  Equity Fund	15%	Earlier it was NIL but after budget for FY 2018-19 it is 10% if capital gain is more than  Rs. 1 lakh (without indexation)
  Non-Equity Fund	As per individual tax slab	Listed funds - 20% (with indexation) Unlisted Funds – 10% (without indexation)

• TDS rate for a NRI investing in mutual funds is same as the tax rate applicable to him. As mutual fund house is not aware of individual tax slab, they deduct maximum tax permissible by law, which is currently 30%.
  
  
  

  	STCG	LTCG
  Equity Fund	15%	10%
  Non-Equity Fund	30% (Highest tax slab)	Listed funds - 20% (with indexation) Unlisted Funds – 10% (without indexation)

Taxation on Mutual Fund Dividends

Some individuals opt for dividend option to have a passive income. Let understand how this dividend is taxed at the individual's end and the end of Mutual fund house before distributing dividend.

• Dividends on Equity Funds
• Dividends received by the unit holder is completely tax free for equity mutual fund.
• This dividend declared by the Mutual Fund house was tax free before budget for FY 2018-19. Now there is 10% dividend distribution tax(DDT). DDT applicable for equity mutual fund is 10.40% (10% tax + 4% Cess).
• Dividends on Debt Funds
• Dividends received by the unit holder is completely tax free for debt mutual fund.
• This dividend declared by the Mutual Fund house is not tax free. Tax is deducted by them before distributing dividends and is known dividend distribution tax (DDT). DDT applicable for debt mutual fund is 29.12% (25% tax + 12% Surcharge + 4% Cess).

Exit load on Mutual Funds

Exit loads are imposed to discourage premature withdrawals. If you sell mutual funds, you pay a small penalty, this is called exit load. Equity mutual funds, generally impose exit load of 1% before 365 days. It means if you redeem units before 365 days than you will be charged 1% of the redemption amount. If you redeem after 365 days then there will be no exit load.
Debt funds either have no exit load or the period of exit load is very less. Mostly it is 90 days. However, a fund with no exit load doesn't make it better than the fund with exit load. While redeeimg units, exit load should also be considered.

Happy Investing!!!