Mutual Fund Redemption Taxation

Long-term Capital Gains

1. Tax-saving Equity Funds

An investment made under ELSS (Equity Linked Savings Schemes) qualifies for tax exemption under section 80C. The total savings under 80C that qualifies for exemption is Rs.1.5 lakhs (max).

Apart from ELSS, other payments like LIC, PF, Children’s school fees, etc also qualify.

If an investor has no other deduction in 80C, he can invest a maximum of Rs.1.5 lakhs to qualify for tax exemption. If the investor is in the 20% tax bracket, he saves Rs.30000 tax.

If the investor claims a Rs.50,000 exemption on payment of children’s school fees, PF, etc, he can invest Rs.1 lakhs in ELSS. The maximum permissible exemption under 80C is Rs.1.5 lakhs

ELSS comes with a locking period of 3 years. The investor can’t redeem the units before 3 years.

Long-Term Capital Gain (LTCG) Tax on redemption is exempted up to Rs.1 lakh. If LTCG is more than 1 lakhs, the applicable tax is 10% without indexation

2. Non-tax Saving Equity Funds

Long-Term Capital Gain (LTCG) Tax on redemption is exempted up to Rs. 1 lakh. If LTCG is more than 1 lakh, the applicable tax is 10% without indexation.

b) Short-term Capital Gains

Short-term capital gains are taxed @ 15%

1. Debt Funds

Long-term capital gains (=>36 months) on debt funds are taxed at 20% after indexation. (Indexation takes into consideration the inflation between the year of purchase of debts funds and the year of sale of debt funds)

Short-term capital gains (< 36 months) on debts funds are added to your income and taxed as per the applicable slab your income falls under (5% or 20% or 30%)

2. Balance Fund

They are equity-oriented funds that invest 65% (minimum) of assets in equities. These are taxed as, “Non-tax savings equity funds”.

3. Systematic Investment Plan (SIP)

Each investment is considered a new venture and capital gains are taxed accordingly.

The following example will help to understand tax:

One investor invests Rs 5,000 per month starting from April 2020

Another investor invests Rs 60,000 lump sum at the same time

Both redeem their entire funds.

In the case of a SIP investor, Rs 5,000 will qualify for tax exemption as the investment made in April 2020 would have exceeded more than 1 year as of May 2021

In the case of an investor who invests Rs 60,000 lump sum in April 2020, the entire capital gain is exempted.

Hi thanks but I want to know does the fund house deduct tax automatically ?

If you are Resident Indian, no tax  would be deducted by fund house...

Originally posted by : Dhirajlal Rambhia
	If you are Resident Indian, no tax  would be deducted by fund house...

If NRI then would tax be deducted by MF house ? 

Yes, mutual fund investments made by NRIs are subject to TDS deductions. If invested in equity funds, TDS will be deducted from your LTCG at 10%.

The same for debt and other non-equity funds is 20%.