The secret of successful investment is to diversify the risk and one of the ways of achieving the same is investing in mutual funds. Investment in mutual funds has become relatively popular in the recent times as it is not just a safe avenue but also has inbuilt tax efficiency.

Depending on the risk appetite and the expectation of return, one may decide the type of mutual fund i.e. equity or debt, growth or dividend, etc. However, it is useful to know the tax treatment of investment and the returns on such mutual fund.

Investment in MFs Investment in instruments prescribed under Section 80C of the Income-tax Act, 1961 (?the Act?) are eligible for deduction from the total income of the individual. The overall ceiling for deduction under this section is R1,00,000, irrespective of the actual investment and investment in mutual funds is eligible for this deduction. The dividend received from mutual funds is exempt under section 10(34) of the Act in the hands of the individuals.

Sale of Mutual Funds

The difference between the sale consideration and the cost of acquisition of the mutual funds, would result in capital gains or capital loss, as the case may be. These capital gains or loss on sale of mutual funds can be classified as short-term capital gains (STCG) or long-term capital gains (LTCG) depending upon the period for which these are held before the sale.

In case mutual funds are held for not more than 12 months before the sale, then gains arising from these would be classified as STCG. If mutual funds are held for more than 12 months before sale, the capital gains would qualify as LTCG.

Taxability

The tax treatment on sale of mutual funds depends upon certain factors such as duration of holding, type of fund, whether Security Transaction Tax (STT) paid has been paid, etc. Decisions for investment in instruments are based on individual?s personnel preference and objective of making such investment. While factors such as associated risks and returns hold pre-dominance while choosing an investment, one should also be aware of the tax effect/ benefit while evaluating the actual returns from an investment.

The writer ED (tax) KPMG; with inputs from Neetika Khosla