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Like every other products, returns from Mutual Funds also come under taxation. Tax in Mutual Funds/Stocks is called Capital Gain Tax. However Tax arises only in the year in which the fund is sold. So, if you are buying Mutual funds continuously for 5 years but sell only in the 6th year, then tax will be applicable only in the 6th year, based on how much fund value has appreciated.
Type of Capital Gain Tax:
- Long Term Capital Gain (LTCG) Tax
- Short Term Capital Gain (STCG) Tax
From taxation perspective, Mutual funds fall into 2 categories:
Equity Fund
Equity funds are those funds where at least 65% of fund is invested by the fund scheme in Equity/Stocks. Most of the funds falls in this category.
If Equity fund is sold after 1 year of purchase, then the gain is called Long Term Capital Gain (LTCG). If fund is sold before 1 year of purchase, then it falls under Short Term Capital Gain (STCG). LTCG tax is 10% of the gain. STCG is 15% of the gain.
Debt/Liquid Fund
Debt funds are those fund schemes where Equity exposure is less than 35%. While Liquid funds are those funds where there is no Equity exposure.
If fund is sold after 3 year of purchase, then the gain is called Long Term Capital Gain (LTCG). Long Term Capital Gain Tax on Debt/Liquid fund is 20% after Indexation.
If fund is sold before 3 year of purchase, then it falls under Short Term Capital Gain (STCG). The Short Term capital gain generated from Debt/Liquid fund is added to individual’s income and tax as per the tax slab of the person.
Summary of Taxation:
Happy Investing.
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