Mutual Funds and Bank FD – understanding tax implications

When it comes to investment, people usually opt for fixed deposits considering them to be relatively risk free. We generally compare the rate of return and the risk factors associated with investment opportunities. But we ignore the tax implications; considering them might change our decision. In the article, we will discuss about the Taxability of Mutual funds and Bank FD.

Mutual Funds

Taxability of mutual funds depend on the type of MF. There are basically two types of Mutual Funds.

  • Equity oriented Mutual funds– Equity MF raise money from public and invest majority portion of their fund in the stock market.

 

  • Debt (Non-Equity) oriented Mutual funds– Debt mutual funds invests in various fixed income earning investments like govt bonds,RBI bonds and other highly rated securities

Taxability

MF gives you the return in the form of capital appreciation. Returns are taxable under the head capital gains. Capital gain is simply the profit on your investment when you sell your investment in mutual fund. Capital gains can be long term or short term, depending on how long you hold the investment in MF.

  • Equity Mutual funds

In case of Equity MF, Short term capital gain (STCG) arises if they are sold within a period of one year from the date of acquisition. The profit arising from the sale will be taxable at the rate of 15%

Long term capital gain arises, if MF are sold after a period of one year. It is completely tax free.

  • Debt Mutual Funds

In case of Debt MF, Short term capital gain arises, when they are sold within a period of 3 years from the date of acquisition. It is taxable as per individual tax bracket. It means if you are in 20% tax bracket, then it will be taxable at 20%.

Long term capital gain arises, if MF are sold after a period of 3 years from the date of acquisition. It is taxable at the rate of 20% with indexation. Indexation is a method by which your cost is adjusted for inflation.

We have summarised the taxability of MF in the table given below:

 Capital Gain Tax rates 

Type of MF Scheme Short term capital gain

            (STCG)rate

Long term capital gain

         (LTCG) rate

Equity MF

STCG -If held for  less than one year

LTCG- If held for  more than one year

15% NIL
Debt MF

STCG -If held for  less than 3 years

LTCG- If held for  more than 3years

As per individual tax bracket 20%(with indexation)

 

 

 

Dividend Income from Mutual Funds – Tax Free

Investors don’t have to pay any tax on the dividend income received from mutual funds. It is tax free for investors.  Only the mutual fund company has to pay a dividend distribution tax before distributing the dividend to the investors in case of Debt MF.

Fixed Deposits

Fixed deposits offer fixed rate of interest for a pre specified tenure. Interest income from fixed deposits is chargeable to income tax as per the individual tax bracket. This means, if you are in the 20% tax bracket, you will have to pay 20% tax on your interest income.

Banks deduct TDS on interest if the interest amount of the FD is greater than 10,000 per year. The rate of TDS deducted by the banks is 10% provided PAN is submitted.

Our Take

In terms of taxability, Mutual fund seems to be more tax friendly if money is invested for a longer period and it can be more beneficial for the individuals in 30% income tax bracket. Find out more about how to save tax and invest wisely with us here.

 

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