Understanding the tax implications of an investment can be tough, and this is especially true of MFs. Income (such as dividend) received from the units of an MF registered with the Securities and Exchange Board of India (Sebi) is exempt in the hands of the unitholder. Separately, gains from sale of MFs have beneficial taxation, depending on whether the investment is made in equity- or debt-oriented funds.
The applicable short-term capital gains tax on sale of equity-oriented MF units, where securities transaction tax (STT) has been paid and assets held for less than one year, is 15%. However, for assets held over one year, there is no long-term capital gains tax. For sale of non-equity-oriented funds where STT has not been paid, short-term capital gains tax is applicable at slab rates and, for long-term capital gains tax, it is 20% after indexation or 10% before indexation, whichever is beneficial.
Moreover, you need not worry even if you incur a loss on sale of your MF units short-term capital losses can be set off against both long- and short-term capital gains. Further, long-term capital losses can be set off against long-term capital gains. Where one cannot set off losses in the year in which they are incurred, these can be carried forward up to eight years to be set-off against future gains, if any.
One may also consider investing in equity-linked savings schemes (ELSS), which were introduced to encourage investments in capital markets. An ELSS is a diversified mf with the majority of its corpus invested in equities. Apart from the tax benefits discussed above,contribution towards ELSS are also eligible for deduction from your taxable income under Section 80C of the I-T Act, 1961. (deduction under the relevant
section is available up to a maximum amount of R 1 lakh.)
Another recent option are gold exchange-traded funds, commonly called gold ETFs, which are MF units representing physical gold, in either paper or dematerialised form. Gold ETFs have an edge over physical gold in terms of taxability they qualify for long-term capital gains treatment after being held for just one year unlike physical gold, which needs to be held for three years to qualify as a long-term capital asset. The taxability on sale of gold ETFs is similar to that for a non-equity oriented mf.
The smart choice would be to determine a balanced mix, both from a tax-saving and wealth-creation perspective, while considering the liquidity factor. A good mix of instruments would not only help you save taxes, but also help you achieve your financial goals over the long run.
The writer is senior tax professional, EY. Views expressed are personal