What are the tax implications of mutual funds?

Mutual funds deliver tax-efficient returns to their investors and all of these mutual fund schemes are taxed differently.

Mutual funds are known as one of the tax-efficient investment instruments as compared to bank fixed deposits. Fixed deposit interest is taxed as per the income slab rates, which is even worse for higher income tax brackets.

Mutual funds offer various types of schemes such as equity-oriented schemes, debt-oriented schemes, hybrid schemes, and solution-oriented schemes among others. All of these schemes deliver different returns based on their risk meter.

The equity-oriented mutual fund schemes have high risk, debt-oriented mutual funds have low risk and hybrid schemes have moderate risk as they are a combination of both equity and debt. These schemes are further divided into various categories. As per SEBI, the equity-oriented scheme is divided into 10 categories, the debt-oriented scheme is divided into 16 categories and hybrid schemes are divided into 6 categories.

All of these schemes are taxed differently. Let’s look at how different categories of mutual funds are taxed:

1. Equity-oriented schemes:

• Short term Capital Gains (STCG): The capital gains arising within 12 months or one year are known as Short Term Capital Gains. These capital gains are taxed at the rate of 15%.

• Long Term Capital Gains (LTCG): The capital gains arising after 12 months or one year are known as Long Term Capital Gains. The capital gains are exempted up to Rs 1,00,000 and if capital gains exceed the amount Rs 1,00,000 then they will be taxable at the rate of 10% without indexation.

2. Debt-oriented schemes:

• Short Term Capital Gains (STCG): The capital gains arising within 36 months or three years are known as Short Term Capital Gains. These capital gains are taxed as per the income tax slab rate of the individual.

• Long Term Capital Gains (LTCG): The capital gains arising after 36 months or 3 years are known as Long term Capital Gains. These capital gains are taxed at the rate of 20% with the benefit of indexation.

3. Hybrid Schemes: The hybrid funds are taxed a little different as compared to other mutual fund schemes as they are a combination of equity as well as debt. The taxation of hybrid funds is dependent on the exposure of equity in the scheme. If the equity exposure exceeds 65%, then it will be an equity-oriented hybrid scheme and if exposure of equity does not exceed 65%, then it will be a debt-oriented hybrid scheme. The equity-oriented hybrid scheme will be taxed the same as any other equity-oriented scheme. Similarly, a debt-oriented scheme will be taxed the same as any other debt-oriented mutual fund scheme as mentioned above in the article.