Understanding equity mutual funds taxation

Taxes are more or less everywhere around us. You go to a restaurant, and your bill will have charges like Goods and Services Tax (GST). Check your Income Tax Return (ITR), and you will find professional tax. Import goods from abroad, and you will pay customs duty! Amidst all these taxes and more, there is one more tax category known as the capital gains tax. This is levied on your capital gains earned from stocks, real estate, mutual funds, etc. There are different ways in which capital gains tax is levied on different types of securities. This article will discuss equity mutual funds taxation, so you can understand how to plan your investments and redemptions better.

What are equity funds? 

An equity fund is a type of mutual fund scheme that is primarily focused on investing in stocks. According to the current SEBI Mutual Fund Regulations in India, these funds are required to allocate a minimum of 65% of the scheme's assets in equities and equity-related instruments. 

Note: SEBI stands for the Securities and Exchange Board of India

Equity funds can be both actively managed and passively managed. In actively managed funds, experienced fund managers carefully select and manage the portfolio, aiming to outperform the market.

On the other hand, passive equity funds seek to replicate the performance of the benchmark index by investing in similar stocks in the same proportion as the index.

Now that you know the basics of equity funds, it is time to get acquainted with their tax exemptions, tax liabilities, and holding periods. 

Long-Term Capital Gains (LTCG) tax on equity mutual funds 

The holding period to differentiate between long and short-term gains is one year for equity funds. If you hold equity mutual funds for more than one year from the date of purchase, any profits earned are considered LTCG. As per the prevailing tax rules, LTCG on equity mutual funds exceeding Rs 1 lakh in a financial year are subject to a flat tax rate of 10%.

Short-term Capital Gains (STCG) tax on equity mutual funds  

If you hold your equity mutual funds for up to a year from the date of purchase, any gains earned are considered STCG. STCG on equity mutual funds are taxed at a flat rate of 15%.

Taxation on Equity-Linked Saving Scheme (ELSS)

 Equity Linked Savings Scheme (ELSS) is the only type of mutual fund scheme that qualifies for a tax deduction under Section 80C of the Income Tax Act, 1961. This means you can claim a tax deduction of up to Rs 1.5 lakh per annum on your investments made in an ELSS fund and reduce your taxable income.

What are the factors involved in determining the tax on equity mutual funds? 

Here are some factors that can affect the tax you pay on your equity funds: 

• Holding period:The tax rate can differ by 5% between STCG and LTCG tax. Profits earned from units redeemed after a year are subjected to LTCG tax, which is the lower of the two. Hence, you must plan your redemptions well to minimise your tax dues and maximise your take-home returns.
• Tax laws:The tax laws subject to equity mutual funds taxation can change over time with new economic policies. It is essential to stay updated on the latest regulations to plan your investments and redemptions.

Conclusion

If you are planning to invest in equity funds or already have them in your portfolio, it is critical for you to understand their taxation. This will enable you to make the most of your funds. Moreover, make sure to follow budget updates each year and look out for new government announcements regarding equity mutual funds taxation to stay informed.

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