Tax Provisions for investment in mutual funds
As any investor would agree, our investment decisions are guided not only by the features of a particular financial product or its suitability, but also by the prevailing tax provisions that the instrument is subject to. As such, like any other financial product, there are tax implications of investing in mutual fund schemes too. Different types of schemes are subject to different tax provisions. The tenure of investment is also an important factor when deciding upon one’s tax liability. Therefore as an investor, we must have a good understanding of the relevant tax provisions, to help us plan our investments in a better manner.
Taxable event in case of investment in mutual funds may occur in the following circumstances:
Current tax laws prescribe different tax provisions for equity-oriented mutual funds and other than equity oriented funds. However, dividend income received in respect of the units of a mutual fund scheme is exempt from tax in the hands of an investor, irrespective of the nature of the scheme.
But before we move on to the relevant provisions of tax, let us have a look at different terminologies used in tax parlance and what they mean:
Equity-oriented fund: is a mutual fund scheme where the funds are invested in the equity shares of domestic companies to the extent of more than 65 % of the total proceeds of such fund.
Long Term Capital Gains: When units of the mutual fund scheme are held for a period of more than 12 months immediately preceding the date of transfer/redemption, they will be treated as long-term capital assets and gain arising from redemption/sale of such units is treated as long term capital gain.
Short Term Capital Gains: If the units are held for less than 12 months, they would be treated as short-term capital assets and gain arising from redemption/sale of such units is treated as short term capital gain.
