Understanding Taxes On Mutual Funds

All mutual fund houses sell their mutual funds by showcasing the past performance of their mutual funds and the potential returns these schemes are expected to enjoy. However, nobody talks about the taxation aspect. It is important to understand the taxes on mutual funds as taxes and inflation can eat away a huge chunk of your sizeable returns. This article will act as a mutual fund investment guide and how they are taxed.

Understanding the types of taxes imposed on mutual fund investments

Mutual fund investments can offer returns to investors in two forms – either through capital appreciation or through dividend recipients. The taxation aspect on mutual fund investment is largely dependent on two factors – the types of mutual funds you choose to invest in (debt funds, equity funds, or hybrid funds) and the holding period of the investment. If you are unsure what a holding period of an investment is, do not worry, we will explain it out to you in layman terms. The holding period of the investment refers to the duration for which you stay invested in a particular mutual fund scheme. There are two types of holding period – short-term holding period and long-term holding period. Both equity and debt funds have different criteria that constitute a short-term holding period and a long-term holding period.

Taxation on mutual fund investments

Capital earns refers to the profits earned on mutual fund investments which is possible when the sale of the mutual fund schemes is greater than the purchasing cost of the same. Depending on the holding period of the mutual fund investments, capital gains are further bifurcated into two types – long-term capital gains (LTCG) and short-term capital gains (STCG). Let’s have a look on these capital gains influence on the tax outgo on mutual fund schemes.

Mutual Funds