Can Mutual Funds help you save tax ?
To analyse tax savings from mutual funds, we first categorize them into debt and equity mutual funds. Equity mutual funds are those funds which invest 65% or more of its portfolio in equity, whereas, the others are considered debt. This categorization is solely for tax purposes.
Equity Mutual Funds
Equity funds are generally seen as the high-risk high returns funds. Any profit on the sale of equity mutual funds, if this sale was undertaken within a period of twelve months, is taxable at 15% on the gains made on such sale.
If an equity mutual fund is sold after any period exceeding 12 months, the gains are not taxable as it is considered a long-term capital gain. Also, any dividend (not the same as gain on sale) received from such equity mutual funds is not taxable, whether received within a period of 12 months or after.
Equity Mutual Funds
Debt Mutual Funds
Debt funds differ from the above. To classify as a long-term gain, debt funds should be sold only after a period of 36 months. Any sale earlier than this period will be classified as short-term and will be taxable depending on the rate corresponding to the investor’s tax slab.
Unlike equity mutual funds, debt funds are taxable even if they’re sold after a period of 36 months has elapsed since their purchase. However, the investor gets indexation benefit, that is, your purchase price will not be taken as it is but inflated to current year’s inflation rate (index value) so that a reliable estimate of the purchase consideration to acquire such debt funds at current prices can be made. This inflated value is always higher than what you invested and thus your long-term capital gains will not be too high. These gains are taxed at 20% irrespective of income bracket.
The dividends received even from debt mutual funds are exempt from tax. Therefore, the dividend received by the investor is not taxable but the mutual fund houses are required to pay such dividend after deducting tax.
The above text thus gives you an insight into the benefits you accrue by investing in mutual funds whether equity or debt.
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