Taxes on Mutual Fund - In India
Tax on the Indian mutual fund is divided into Two categories
- Tax on Equity Mutual Fund
- If the investment is done for more than 1 year before withdrawal, then it will fall under Long Term Capital Gain. The tax will be 10% on the profit exceeding Rs-1 lakh.
- If the investment is done for less than 1 year before withdrawal, it will fall under Short Term Capital Gain. The tax would be flat 15% on the profit.
- Tax on Debt Mutual Fund
- If the investment is done more than 3 years before withdrawal, it will fall under Long Term Capital Gain. The tax would be 20% on the profit after indexation (indexation consider inflation and hence the effective tax will be less than 20%).
- If the investment is done less than 3 years before withdrawal, it will fall under Short Term Capital Gain. The tax would be deducted according to your tax slab.
Let’s first understand the tax on equity mutual fund-
Case 1 - One-time buying
a) Selling the equity mutual fund after 1 year.- If You have invested Rs 10 lakh in equity mutual fund. Now, if you sell it after 1 year, you will have to pay a Long Term Capital Gain (LTCG) tax of 10%.
- Let’s consider one has sold the mutual fund after 1 year and 1 month. In this case, he fall under LTCG category.
- If at the time of selling his total investment value has became say Rs 13 lakh then he will have to pay 10% tax on profit minus 1 lakh i.e. Rs 3 lakh (profit) - 1 lakh = Rs 2 lakh.
- 10% of 2 lakh is Rs 20,000. Hence his total tax is Rs 20,000.
- Now let’s say one has invested Rs 10 lakh and after 9 months he sold his holdings and at the time of selling the investment value has became say Rs 11.5 lakh. Then he will have to pay a Short Term Capital Gain (STCG) tax of flat 15% on the profit.
- This means 15% of 1.5 lakh = Rs 22,500 as tax.
- Let's say you have started a SIP of Rs 10,000 on 5th April 2018 in an equity mutual fund. This SIP is applicable on the 5th of each month.
- Now let’s assume that the NAV of that mutual fund on 5th April 2018 was Rs 20 and till June 2019 it became Rs 46.
- You have invested for 15 months (Rs 10,000 each month).
- On 5th April 2018, you bought 500 units (10,000/20), 5th May 2018 = 454.5 units (10,000/22), etc. (as shown in below table)
- The total units purchased till June 2019 would be 4657.9 and NAV in June 2019 is 46. Hence total investment value would be Rs 2,14,262 (4657.9*46)
Now let's say you want to sell mutual fund worth 1 lakh
- Total mutual fund units to sell = 2173.9 (1,00,000/46) - Amount/NAV
- Now when did you purchase a total of 2173.9 units? You purchased them by September 2018.
- Since the units purchased in April, May and June have completed 1 year, you will have to pay 10% tax (after rebate on profit up to 1 lakh) on 1339.2 units (purchased till June).
- Rest of the units are purchased within 1 year and hence you will have to pay flat 15% tax on profit. Units purchased 2173.9–1339.2 = 834.8 Units.
- Amount paid to purchase 1339.2 units till June = Rs 30,000
- Investment value on 1339.2 units (purchased more than 1 year ago) = Rs 61,601 (1339.2*46).
- Profit = 61,601–30,000= Rs 31,601.
- Tax to be paid = 0 (This is because in LTCG after 1 year, you don’t have to pay tax till the profit of 1 lakh and profit on long term units is Rs 31,601.)
- Now, the amount paid to purchase rest of the 834.8 units= Rs 20,000 for July and August and Rs 2,011 in September. Total amount paid= Rs 22,011.
- Profit on the remaining units purchased within 1 year =Rs 38,398–22,011= Rs 16,387. Tax = 15% of 16,387 = Rs 2,458.
- Hence, the total tax paid on withdrawal of Rs 1 lakh would be Rs 2,458.
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