All about capital gains tax on mutual funds

Many of us who invest in mutual funds focus only on the potential returns on their investment. Unlike taxation of traditional investments like fixed deposits, taxation of returns from equities and MFs is not a much sought-after topic. However, taxation norms for MFs must be taken into consideration to calculate the effective post tax returns on mutual fund investment.

Capital Gains Tax
When you make a profit by selling any non-inventory asset, you are liable to pay a capital gains tax. This tax is further classified as long-term or short-term depending on the tenure of investment.

However, the definition of long-term and short-term differs for equity and debt funds. For equity funds, the threshold for long-term gains is one year, while it is three years for debt funds.

Understanding the mutual funds taxation
Mutual fund taxation depends on three basic parameters including your residency status, the type of mutual fund investment and the holding period.

Residential Status:
Tax calculation will depend on whether you are a resident Indian or a non-resident Indian (NRI). For example, if you were a resident Indian at the time of investment, but come under NRI status for this financial year, your mutual fund taxation will be as per the current status.

Type of investment:
Mutual funds are primarily divided into two types, namely equity and debt. A fund that has more than 65 per cent investment in equity comes under the equity category and others are treated as non-equity or debt MF.

The tenure for your investment:
The quantum of tax that you will pay for your mutual fund investment will depend on the tenure of investment in the fund. Both long-term capital gains tax (LCGT) and short-term capital gains tax (SCGT) are calculated based on how long you are staying invested.

Taxation for FY2016-17
* If your fund comes under an equity fund, you will have to pay short-term capital gains tax of 15 per cent if your holding period is less than one year. Investments with a holding period of more than one year is free from tax.
* If the fund you have invested is a debt fund, you have to pay short-term capital gains tax as per your tax slab if the holding period is less than three years. For holding period beyond three years, you pay 20 per cent long-term capital gains tax with indexation.
* If the investment is made in an unlisted fund, then only 10 per cent tax without indexation is applicable.

(The writer is the CEO of BankBazaar.com)