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  • Capital Gains On Mutual Funds

    Overview:

    Capital gains generally refers to the gains or profits an individual makes on the sale of any capital assets. These assets could be either financial assets or non-financial assets. While non-financial assets could be any physical item ranging from property, automobiles etc, financial assets are those assets that are non-physical or intangible in nature such as bonds, stocks, deposits, mutual funds etc.

    Capital Gains On Mutual Funds:

    Any profit or gains that an individual makes on the sale or redemption of his or her mutual fund investment units.

    These gains can be classified into two types based on the holding period:

    • Long Term Capital Gains
    • Short Term Capital Gains

    Short Term Capital Gains:

    In general, Short Term Capital Gains with respect to mutual funds, are the gains or profits an individual makes on the sale of his or her mutual fund investments if the period of holding is less than twelve months. However, short term capital gains can be acquired on both equity mutual funds as well as debt mutual funds.

    • For Equity Mutual Funds: If an individual makes a profit on the sale or transfer of his or her equity mutual fund units before twelve months, then the profits are termed as short term capital gains.
    • For Debt Mutual Funds: If an individual makes a profit on the sale or transfer on his or her debt mutual fund units before the completion of three years, then the profits are termed as short term capital gains.

    Long Term Capital Gains:

    Long Term Capital Gains with respect to mutual funds, are the gains or profits an individual makes on the sale of his or her mutual fund investments if the period of holding is more than twelve months. Long term capital gains can also be acquired on both equity mutual funds as well as debt mutual funds.

    • For Equity Mutual Funds: If an individual makes a profit on the sale or transfer of his or her equity mutual fund units that were held for more than twelve months, then the profits are termed as long term capital gains.
    • For Debt Mutual Funds: If an individual makes a profit on the sale or transfer on his or her debt mutual fund units that were held for more than three years, then the profits are termed as long term capital gains.

    Calculation of Capital Gains:

    Capital gains can be calculated in the following way:

    Capital Gains = The full sale value of the mutual fund investment units less the total of the cost of sale or transfer of said units, the price of acquisition of said units, and the improvement costs of said units.

    Capital Gains Tax:

    The tax that is levied on the gains or profits that are made from the sale of mutual funds investment units is called Capital Gains Tax. While long term capital gains that an individual acquires from the sale or transfer of mutual fund investments are exempt from tax as per Section 10(38), short term capital gains that an individual acquires from the sale or transfer of mutual fund investments attract a tax rate of 15% as per Section 111A.

    However, the taxation rate is dependant on certain factors such as:

    • The individual’s residential status:
      • Resident Indian
      • Non Resident Indian (NRI)
    • The type of mutual fund scheme that the individual holds:
      • Equity mutual funds: Where a minimum of 65% of the fund is invested in equity like sector funds, large cap funds etc
      • Non-equity mutual funds or Debt mutual funds: Where less than 65% of the fund is not invested in equity like gold funds, liquid mutual funds, infrastructure debt funds etc
    • The type of capital gain as well as the holding period:
      • Short term capital gains with a holding period of less than one year for equity mutual funds and less than three years for non-equity mutual funds
      • Long term capital gains with a holding period of over one year for equity mutual funds and over three years for non-equity mutual funds

    Taxation of Short Term Capital Gains On Sale Of Mutual Funds:

    Short term capital gains obtained on the sale or transfer of equity mutual funds units are taxed at a rate of 15% as per Section 111A only if the following conditions are met:

    • If the sale or transfer of the mutual fund units took place on or beyond October 1st 2004
    • The sale or transfer took place via a recognised stock exchange

    However, the rate of tax levied on short term gains or profits obtained from the sale or transfer of non-equity mutual fund units or debt mutual fund units will be according to the income tax slab rate of the investor.

    Taxation of Long Term Capital Gains On Sale Of Mutual Funds:

    Long term capital gains obtained on the sale or transfer of equity mutual funds units are exempt from tax as per Section 10(38). The taxpayer will however be liable to show any long term capital gains or profits when he or she is filing tax returns for the year. However, any long term capital gains or profits obtained on the sale or transfer of non-equity mutual fund units or debt mutual fund units will attract a tax rate of 20% with the benefit of indexation.

    Taxation of Short Term and Long Term Capital Gains on sale of Mutual Funds for Non Resident Indians:

    The tax rates applicable to the short term as well as long term capital gains on the sale of mutual funds for non-resident Indians (NRIs) is as follows:

    • For short term capital gains:
      • 15% on the sale of equity mutual funds
      • On the sale of non-equity mutual funds - As per the income tax slab rate of the investor. However, a 30% TDS rate will apply.
    • For long term capital gains:
      • No tax on the sale of equity mutual funds
      • 20% on the sale of listed non-equity mutual funds with the benefit of indexation
      • 10% on the sale of unlisted non-equity mutual funds without the benefit of indexation
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