Investing in mutual funds could be more profitable than fixed deposits due to its higher return than FDs. Relatively, the risk of investing directly in the stock market is less than that of hoping for more benefits on fixed deposits. However, as compared to fixed deposits, the law of income tax in mutual funds is a bit complicated.
Mainly, mutual funds have two ways of earning. First Capital Gain and Second Dividend Income. Both earnings are taxable. When a profitable company having surplus money for dividend distribution, they distribute it to the stakeholders in the form of dividends. Mutual fund investors get the dividends for the same unit that they have, and when they sell their unit, it is called Capital gains. Precisely, if the sales value is more than the purchase value, then it is called capital gains. A capital loss occurs when the sale value is less than the purchase value.
Earnings on Dividend Are Considered to Be Your Income
As per the current rules, if a mutual fund issues a dividend, then that income is added to your total income. After that, income tax is deducted according to your total annual income if falls under the income tax slab. The dividend income was tax-free earlier. On March 12, the Income Tax Department has issued a circular in which mutual fund companies have been asked to share the complete information with the income tax department on sharing of capital gains and dividends.
Capital gains are taxed in two ways depending on what kind of fund you have. If you have invested in an equity fund, it will be a short-term capital gain if you sell the unit before 12 months, whereas it will be a long-term capital gain if you sell the unit after having it for more than 12 months. The debt fund will attract STGC tax for 36 months while LTCG tax will be levied thereafter. Both types of funds charge a flat 15 percent tax on short-term capital gains, while capital gains are tax-free up to 1 lakh in long-term capital gains. After that, a flat tax of 10 percent is levied.
In fixed deposits, the interest income gets added to your total income on which tax is deducted. This is why it is a loss deal for the high tax slabs while this is not the case with mutual funds. Mutual funds are considered very tax-friendly.
The assessment year 2021-22 is going on. At present, returns are being filed for the financial year 2020-21. The government has issued many stricter rules to curb tax evasion. In such a situation, it is important to keep in mind that you should be well prepared before filing the return. In this case, efficient accounting software can help you achieve your objective with ease.
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