Your Money-Mutual funds: How holding period impacts taxation

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October 29, 2021 12:15 AM

Equity funds held for a period of more than or equal to 12 months are considered as long-term investments

On the other hand, for debt funds to short-term investments, the holding period must be less than three years.On the other hand, for debt funds to short-term investments, the holding period must be less than three years.

If you invest in mutual funds, it is important to know the tax implications on your investments. Mutual funds are taxed according to the holding period or the investment duration. There are two types of holding period—long-term and short-term. Different types of mutual funds have different measures for what constitutes a short-term holding period and long-term holding period.

Short-term holding period
Equity funds held for less than 12 months are termed as short-term investments. On the other hand, for debt funds to short-term investments, the holding period must be less than three years.

Long-term holding period
Equity funds held for a period of more than or equal to 12 months are considered as long-term investments. Contrary to that, debt funds are considered as long-term investments if the holding period is equal to three years or more.

Taxation on mutual funds
When the sale price of the mutual funds is greater than buying price, an investor earns profit on their mutual fund investments. This profit is termed as capital gains. Depending on the holding period of an investment, capital gains are further divided into long-term capital gains (LTCG) and short-term capital gains (STCG). The tax implications of mutual fund investments are dependent on these capital gains.

Equity funds: LTCG on equity funds are taxed at 10% per annum without the benefit of indexation. LTCG on equity funds of up to `1 lakh per annum are exempt from any tax. STCG on debt funds are taxed at 15% per annum.

Debt funds: LTCG on debt funds are charged at 20% per annum with the additional benefit of indexation. STCG, on the other hand, are taxed basis the income tax slab of the investor.

Hybrid funds: Hybrid or balanced funds with more than 65% of their assets allocated to equity and equity-related securities are taxed like equity mutual funds. Similarly, hybrid funds with more than 65% of their assets allotted to debt funds are taxed like debt mutual funds.

Securities Transaction Tax (STT)
Equity and equity-related securities are also levied with a securities transaction tax at 0.001 % on redemption. Investors receive their funds after STT deduction, so it need not be paid separately.

Source: Tax Guru

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