Mutual fund, as known is one of the investment vehicle preferred by retail investor, who wish to avoid direct risk associated with the equity market. Mutual fund is suggested to one of the better investment vehicle as it is managed by professional and big fund houses, who has near perfect knowledge and information about the market. Due to its functional characteristic of diversification, mutual fund has larger shocker to absorb the shock of the market.
This year budget brought one of the biggest changes in the taxation by application of long-term capital gain on equity mutual fund and direct dividend tax.
Before calculating the taxation on mutual fund, one must keep three points in mind, first and foremost being your residential status, second being type of mutual and the last but not the least, being the holding period of investment.
Residential Status: It straightaway wish to understand,, whether you are a resident of India or a Non resident Indian(NRI). Based on your residential status, taxation rule changes.
Type of Funds: there are different types of mutual funds available in the market, based on where the fund managers invest their corpus. Any fund which is investing more than 65% of its corpus in equity market, then it will be termed as equity oriented fund.
However if the corpus invested in equity fund is less than it will be termed as non–equity fund or debt fund.
Holding Period: the time period from the day an investor purchases an investment plan till the day he sells of the investment plan he bought to realise gains. Term long term and short term investment plan differentiates on the basis of the type of fund one has bought.
Holding an equity fund for less than a year is short term investment, and holding it beyond one year is called long term investment. Whereas for debt fund holding the investment for less than 3 years is termed as short term investment and holding it beyond 3 years is long term.
Difference between taxation on mutual fund for 2017-18 and 2018-19
Understanding the calculation:
In case of short term investment,
Let’s say, a stock market investor have bought 10,000 units of a mutual fund with a price of Rs 100. Sold the shares, before completion of 365 days at a price of Rs 140. Be it before implementation of new tax regime or post implementation, i.e, before or after 31st Jan,2018, implication remain same in case of short term gain.
So the short term gain tax an investor will pay,
In case of long term investment
Let’s say, a stock market investor have bought 10,000 units of a mutual fund with a price of Rs 100. Sold the shares, after 365 days, at a price of Rs 140. Be it before implementation of new tax regime i.e, before 31st Jan,2018
Investor will pay no tax on the gain.
Post implementation, i.e, after 31st Jan,2018, implication will change and investor will pay 10% tax on income exceeding 1,00,000.
Total Gain from investment=(140-100)*10000= 4,00,000
TAX=(4,00,000-1,00,000)*.10= Rs 45000
This is how the gains on equity mutual funds are being taxed post implementation of LTCG , in Budget 2018-19.