The introduction or rather reintroduction of long term capital gains taxes on equity mutual funds including ELSS(equity linked savings schemes) has made some novice investors a bit jittery. A lot has already been written and said about long term equity gains taxes on equity schemes. In short, considering the potentially high returns, Rs. 1 lakh annual gains taxation threshold and the grandfathering of returns till 31 st  January 2018, equity schemes still hold the edge over competing investments. This also holds true for ELSS funds that investors choose for making tax saving investments. In case you are still on the fence regarding if there are any benefits of opting for tax saving mutual funds over traditional tax saving investments, the following are seven top reasons to choose ELSS.

1. Short Lock-in:

All tax-saving investments feature a lock-in period which currently varies from 3 years to 15 years. During this lock-in period you are not allowed to redeem your investment or make withdrawals except for some specific emergencies. As per existing rules, among the available tax saver investments in India, ELSS i.e. tax saver mutual funds have the shortest lock-in period of 3 years. This allows you the ability to shift to a different investment option within a relatively shorter period of time in case your chosen investment is not performing as per your expectations. Obviously in case of tax saver schemes with longer lock-in period, you do not receive the same flexibility.

2. Flexibility to Choose Investment tenure:

The flexibility of mutual fund schemes is unmatched even in case of tax saver investments as you have the option to choose your investment tenure beyond the 3 year lock-in. In case of most other tax saving investments you have to invest in blocks of 5 years or more beyond the initial lock-in period. This is not the case with ELSS schemes – you can stay invested for a day or even for decades after completion of the initial three year lock-in period. Typically staying invested in a top rated ELSS mutual fund for a longer period offers you greater compounding benefits.

3. Potentially Higher Market Linked Returns:

ELSS are market-linked diversified equity schemes, this gives them an edge over fixed return investments that offer tax benefits. The main problem that fixed rate tax saving schemes such as PPF have is that inflation reduces the actual returns generated by these investments over time. Fortunately being market-linked, tax saver mutual funds can provide potentially higher returns that can beat the adverse impact of inflation in the long term. This is the key reason why many individuals who make investments with the intention of planning for retirement or other future expenses have moved away from old school options such as fixed deposits and PPF to mutual
funds and ELSS instead.

4. Compounding Benefit:

Compounding is what makes today’s investments more valuable in the long term and equity linked savings schemes can potentially deliver superior compounding benefit when compared to traditional tax saving investments. This is because the returns offered by traditional instruments such as tax saver fixed deposits and PPF tend to offer a lower rate of return than the average ELSS. This causes the compounding of the initial investments to grow slowly and reduces the overall benefit of compounding for you in the long term. In case of mutual funds such as ELSS, the potential returns being higher, these compounding benefits tend to add up faster for investors. It must however be pointed out that ELSS returns do not have a fixed ROI, hence during some periods, returns will be considerably higher than during other periods with historic long term average returns of equity schemes recorded at 12% per annum.

5. Option of SIP Investment:

SIP or systematic investment plans are akin to recurring deposits for ELSS investments and currently this route has emerged as the key driver of equity mutual fund investments in India. For starters, a SIP allows you to invest over the long term in small installments so you do not need to worry regarding upsetting your monthly or annual budget. SIP is also suitable for individuals
who tend to have trouble saving as the amount gets debited automatically from your bank account. This way you will end up saving money for the future instead of spending it all. Last but not the least, SIP also provides the benefit of rupee cost averaging to investors. The NAV of an ELSS fund changes daily and investing via SIP eliminates the need for investors to time their entry into the market by providing an average value of units (rupee cost averaging) over the chosen investment tenure.

6. High Levels of Transparency:

Mutual fund houses i.e. asset management companies (AMCs) who manage ELSS and other mutual fund schemes are regulated by SEBI (Securities and Exchange Board of India). As per SEBI guidelines, AMCs have to make periodic disclosures regarding key information of all schemes managed by them. Information provided through these mandatory disclosures include net asset value (NAV), assets under management (AUM), scheme returns over different periods, total expense ratio (TER), current asset allocation, etc. While some of these have to be
reported daily, others need to be reported as per a monthly or quarterly schedule. As of now, no tax saver investment in India features a higher degree of transparency than ELSS. Hence tax saver mutual funds ensure that you always have the latest information regarding the status of your investments.

7. Ease of Investment:

The advent of Internet and related technology has significantly eased the pains related to making tax saving investments. However many traditional tax saving schemes such as PPF still require you to physically queue up at a designated bank or post office so that you can subscribe to the chosen instruments. Not in case of tax saver mutual funds. After having adopted Aadhaar-based eKYC, the industry as a whole allows investors to start investing online without having to leave the comfort of their home or office. You can of course still complete an in-person biometric KYC at designated RTA locations, but the advantage of a completely-online cKYC for tax saving investments is currently only available to mutual fund investors.

Courtesy: Paisabazaar
July 10, 2018

A golden rule to follow in tax planning is “The key to smart tax planning is to keep it simple”. One doesn’t have to seek advice from multiple sources and get confused in the process. Plan everything well ahead in the year, instead of the last-minute tricks. You can take advantage of the various exemptions and deductions with simple methods to minimize your tax liability during a financial year.

Use these three steps to make sure that your tax planning is smart. These three steps will ensure that you are on the right track of smart tax planning:

STEPS FOR TAX PLANNING

1. Take advantages from the components of your salary

Some components in your salary structure have provisions of exemptions and deductions under the Income Tax Act. The perks, perquisites or tangible benefits that you are entitled to can be claimed up to some amount as deduction or is exempt in some cases. Few of them have been discussed below:

• House rent allowance: If you are staying in rented accommodation and paying rent then you can claim exemption with respect to the house rent allowance (HRA) u/s 10(13A).
• Education allowance: Any allowance received for education up to Rs. 100 per month up to maximum of two children and hostel stay of employees’ children up to Rs. 300 per month up to maximum of two children from the employer can be claimed u/s 10(14).
• Leave Travel Allowance: Under this, two trips in a block of 4 years, i. Exemption limit where journey is performed by Air – Air fare of economy class by the shortest route or the amount spent, whichever is less ii. Exemption limit where journey is performed by Rail – Air-conditioned first class rail fare by the shortest route or the amount spent, whichever is less

2. Investment in Deductible Options

• Section 80C states the most useful options to maximize take-home salary and lower down the tax pay-out. It offers as much as Rs. 150,000 in terms of tax benefit that can reduce tax outgo by Rs. 45,000 for assessee in 30% tax bracket, when calculated without surcharge and cess.
• Use ‘must-have’ options- Life Insurance and Employee Provident Fund. Expenses like life insurance premium paid and contribution to EPF, school fees can be claimed under 80C.
• You can claim principal repayment towards the home loan, by furnishing a proof of the same u/s 80C. You can also claim tax benefits u/s 24 towards the interest payment on your home loan up to Rs 2, 00,000 in a financial year.
• You can claim a deduction of up to Rs. 25,000 in a financial year for medical insurance premium, provided the installments is for you, your spouse, and your dependent children, as per section 80D.(Rs 30,000 if age of insured is 60 years or more)

Tip: Deductions under this section can be directly claimed in the tax return, and not necessarily claimed through your employer. Most importantly, you have to make these investments by 31st March 2019 for tax benefits for FY 2018-19.

3. Tax Filing

Filing your ITR leads to the right outcome in your tax planning. In order to avoid last-minute hassles, file your returns well in advance. You can do so by e-filing your returns on the income tax department website or other ITR portals.

Points to remember in tax planning:

• Make sure your immediate and mid-term financial needs are covered as most of these investments have a minimum lock-in period of 5 years.
• It’s important to consider several investment opportunities before making a final decision. Ensure that your need of tax saving is not getting fulfilled at the cost of poor returns from that investment.
• Be fully aware of the objective of an investment, its gestation period and maturity terms and conditions.
• It’s not a year-end activity so avoid hasty decisions of investing in tax saving schemes that don’t give you benefits in future. Simple management and strategic decisions at the right time is all you need for smart tax planning!

Income Tax Update: Budget 2019-20

• No Income tax for individuals with Annual Taxable Income of up to Rs. 5 lakh. No change in Income Tax Slabs
• Surcharge increased by 3% for individuals with Income of Rs. 2-5 crores and by 7% for income more than Rs. 5 crores.
• Aadhaar card can now be used interchangeably for PAN card. Thus, you no longer need PAN to file income tax returns.
• Additional deduction of Rs. 1.5 lakhs for interest on home loan availed for purchase of Affordable houses of up to Rs. 40 lakh till March 2020.
• Income tax deduction of Rs. 1.5 lakhs for interest on loan taken to buy an electric vehicle.
• The annual turnover limit for corporate tax of 25% increased to Rs. 400 crores.
• TDS of 2% on cash withdrawal of more than Rs. 1 crore in a year from a bank account to discourage business payments in cash.
• Excise Duty on fuel hiked by Re. 1.

Major Changes made in Income Tax Slabs FY 2018-2019

This financial year witnessed changes which have undergone quite a few alterations in FY 2018-2019. Let’s have a look at the changes upcoming this financial year 2018-2019:

• Tax Rebate for Middle Class:  Individuals having a net taxable income up to Rs.5 lakh has been provided with a full tax rebate under section 87A of the Income Tax Act, 1961. This has been the centre point of interim budget 2019 in terms of changes in taxation.
• Standard Deduction: The interim budget 2019 announced to increase the standard deduction limit from Rs 40,000 to Rs.50,000 for salaried employees.
• TDS Threshold on Rental Income: In the interim budget 2019, the TDS threshold on the rental income has been increased from Rs.1.8 lakh to Rs. 2.4 lakh. Also, the income tax exemption from notional rent for unsold properties has been increased from 1 year to 2 years
• TDS Limit on Interest Income: The budget also provided for no TDS deduction on interest income earned from banks or post office deposits up to Rs. 40,000 annually. Earlier this limit was up to Rs.10,000.

Updated: 29-07-2019 06:04:24 AM

Income tax is referred to as a progressive tax i.e. the rate at which tax on income is payable increases with the income of the assessee. Income tax slab rates specify the threshold annual income limits at which a higher or lower rate of tax is applicable. In the following sections we will discuss the income tax rates for FY 2018-19 (AY 2019-20) and some other key features of income tax in India.

Income Tax Slabs for Assessment Year 2019-2020

As per the Union Budget of 2018, below are the various slabs according to which income tax is assessed in various categories of income tax assessee.

Resident Individuals & Non-Resident Indians

Under existing rules of the Income Tax Act, 1961, resident Indian and non-resident Indians (NRIs) are taxed according to the same income tax slabs and rates. The following are the IT slabs and slab rates for AY 2019-20 in case of resident and non-resident Indians aged less than 60 years:

Additional Components

1. 1. Surcharge: In case income is more than ₹ 50 lakhs and less than ₹ 1 crore, the surcharge is applicable at a rate of 10% of the income tax. For income, more than ₹ 1 crore, a surcharge of 15% is applicable on income tax on the amount exceeding ₹ 1 crore.
   2. Health and Education Cess: “Education Cess” and “Secondary and Higher Education Cess” will be replaced by “Health and Education Cess” at the rate of 4%, on the amount of tax computed, inclusive of surcharge.
   3. The interim budget 2019 has provisioned to provide a full tax rebate to individuals having a net taxable income (income adjusted after eligible tax deductions) up to Rs 5lakhs. It means that the maximum tax rebate provided under section 87A has been increased from Rs. 2,500 to Rs. 12,500. Individuals having net taxable income up to Rs. 5lakhs can claim the tax rebate under 87A and thus effectively pay zero tax.

Hindu Undivided Families (HUFs)

Hindu Undivided Family (HUF) is headed by a Karta (designated head of the family). HUF has a legal identity similar to that of an artificial judicial person for taxation purposes. The following are the Income Tax slab rates applicable to HUF for AY 2019-20 (FY 2018-19):

Additional Components

Surcharge: In case income is more than ₹ 50 lakhs and less than ₹ 1 crore, the surcharge is applicable at a rate of 10% of the income tax. For income, more than ₹ 1 crore, a surcharge of 15% is applicable on income tax on the amount exceeding ₹ 1 crore.

Health and Education Cess: “Education Cess” and “Secondary and Higher Education Cess” will be replaced by “Health and Education Cess” at the rate of 4%, on the amount of tax computed, inclusive of surcharge.

Associations of Persons, Bodies of Individuals and Other Artificial Judicial Persons

As per the definition provided by the Income Tax Act, 1961, an Association of Persons (AoP) and Body of Individuals (BoI) refer to an association/integration of two or more people with the intention of making profits. These are among the commonest examples of artificial judicial persons and are liable to pay tax as per the following income tax slabs:

Additional Components

1. 1. Surcharge: In case income is more than ₹ 50 lakhs and less than ₹ 1 crore, the surcharge is applicable at a rate of 10% of the income tax. For income more than ₹ 1 crore, a surcharge of 15% is applicable on income tax on the amount exceeding ₹ 1 crore
   2. Education Cess: Extra 2% is applicable on the income tax amount plus applicable surcharge.
   3. Higher Secondary & Higher Education Cess: Extra 1% is applicable to the income tax plus surcharge applicable for all tax payers.

Senior Citizens

Senior citizens in India are defined as individuals aged over 60 years and less than 80 years as per current tax rules. The following are the AY 2019-20 income tax slab rates for senior citizens applicable to earnings for the financial year (FY) 2018-19:

Additional Components

1. 1. Surcharge: In case income is more than ₹ 50 lakhs and less than ₹ 1 crore, the surcharge is applicable at a rate of 10% of the income tax. For income, more than ₹ 1 crore, a surcharge of 15% is applicable on income tax on the amount exceeding ₹ 1 crore.
   2. Health and Education Cess: “Education Cess” and “Secondary and Higher Education Cess” will be replaced by “Health and Education Cess” at the rate of 4%, on the amount of tax computed, inclusive of surcharge.

Super Senior Citizens

Under taxation rules in India applicable to income earned in FY 2018-19 for ITR filing in AY 2019-20, super senior citizens are defined as individuals who are aged 80 years and more during the applicable fiscal. The individuals feature IT slab and income tax rates that are different from that of other tax assessees as follows:

Additional Components

1. Surcharge: In case income is more than ₹ 50 lakhs and less than ₹ 1 crore, the surcharge is applicable at a rate of 10% of the income tax. For income more than ₹ 1 crore, a surcharge of 15% is applicable on income tax on the amount exceeding ₹ 1 crore
2. Health and Education Cess: “Education Cess” and “Secondary and Higher Education Cess” will be replaced by “Health and Education Cess” at the rate of 4%, on the amount of tax computed, inclusive of surcharge.

Partnership Firms

The applicable tax rate for any Partnership Firms & Limited Liability Partnerships (LLP) is at a flat rate of 30%.

Additional Components

1. Surcharge: In case income is more than ₹ 1 crore, the surcharge is applicable @ 12% over income tax amount.
2. Health and Education Cess: “Education Cess” and “Secondary and Higher Education Cess” will be replaced by “Health and Education Cess” at the rate of 4%, on the amount of tax computed, inclusive of surcharge.

Local Entity / Authorities

The tax rate applicable for Local Authorities is on a flat rate of 30%.

Additional Components

1. Surcharge: In case income is more than ₹ 1 crore, the surcharge is applicable @ 12% over income tax amount.
2. Health and Education Cess: “Education Cess” and “Secondary and Higher Education Cess” will be replaced by “Health and Education Cess” at the rate of 4%, on the amount of tax computed, inclusive of surcharge.

Domestic Entity Companies

The tax rate applicable for any Domestic Companies is at a flat rate of 30%. However, if the gross receipt of the company does not go beyond ₹ 250 crores in the previous year, the company has to pay taxes at a rate of 25%.

Additional components applicable to Domestic Entity Companies are:

1. Surcharge:In case income is between ₹ 1 crore and ₹ 10 crores, the surcharge is applicable @ 7% of the income tax amount. However, if the amount exceeds ₹ 10 crores, the surcharge payable is at a rate of 12%. The income tax department provides marginal relief to companies in special cases:

(i)  Where income exceeds one crore rupees but not exceeding ten crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees.

(ii)  Where income exceeds ten crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of ten crore rupees by more than the amount of income that exceeds ten crore rupees.

2. Health and Education Cess:“Education Cess” and “Secondary and Higher Education Cess” will be replaced by “Health and Education Cess” at the rate of 4%, on the amount of tax computed, inclusive of surcharge.

Foreign Entity / Companies

Additional Components

1. Surcharge: In case the income is between ₹ 1 crore and ₹ 10 crores, the surcharge is applicable @ 2% of the income tax amount. If income is greater than ₹ 10 crores – 5% of the income tax amount is charged as surcharge
2. Health and Education Cess: “Education Cess” and “Secondary and Higher Education Cess” will be replaced by “Health and Education Cess” at the rate of 4%, on the amount of tax computed, inclusive of surcharge.

Co-operative Societies

Urban / Semi urban/ Rural excluding Self Help Group (SHG) and Agricultural Societies.

Plus:

1. 1. Surcharge:In case income is more than ₹ 1 crore, the surcharge is applicable @ 12% of the income tax amount.
   2. Health and Education Cess:“Education Cess” and “Secondary and Higher Education Cess” will be replaced by “Health and Education Cess” at the rate of 4%, on the amount of tax computed, inclusive of surcharge.

Income Tax Slabs Comparison FY 2019-20 Vs FY 2018-19

Income Tax Slab for individuals less than 60 years of age and HUF

Key Comparisons:

• Income Tax Slabs remain unchanged for FY 2019-20 and AY 2020-21 for all citizens (including Senior Citizens).
• Standard Deduction for salaried taxpayers has been increased from Rs. 40,000 to Rs. 50,000.
• Education Cess on Income Tax has remained same at 4%.
• No further changes in the corporate tax. Corporate tax rate has been maintained at 25% for domestic companies with a turnover of up to Rs. 250 crore.

The income tax slab is a table that shows the threshold limit beyond which a specific tax rate is applicable and various deductions are made as per the applicable rate. To better understand the working methodology of the income tax slab, one has to first understand the vital elements based on which tax slabs are fixed.

Income Tax Act, 1961

The provisions of income tax are contained in the Income Tax Act, 1961 which extends uniformly to the whole of India and has been effective since 1962. The act contains provisions for determining taxable income, tax liability, procedure for assessment of penalties, etc.

1. Annual Amendments –Since the Income Tax Act is a revenue law, it requires amendments whenever the government wants to make changes in it. Under the annual amendment of existing revenue generation requirements, the Government proposes its finance bill, which directly decides the threshold limits for various tax rates which are commonly referred to as Income Tax
2. Income –Income in broad terminology is defined as any receipt in the form of money or money’s worth which occurs with a certain regularity or expected regularity from a definite source.

Key factors based on which, income tax slabs are applicable include:

• Income of assessee
• Residential status of the assessee
• Assessment year
• Rate of tax
• Charge of income tax
• Maximum amount / threshold limit till income is not chargeable/taxable
• Gross income

The income tax slab is applicable to:

• Any resident individual with regular source of income
• A Hindu Undivided Family (HUF)
• A company
• A firm
• An Association of person (AOP) or a Body of Individuals (BOI) whether incorporated or not
• Any local authority

Income Tax Slabs on Dividend

Dividend income received by individuals is taxed based on the source of dividend income i.e. the type of entity declaring the dividend income.

Income Tax Slab for NRI

For the Financial Year of 2018-19, the tax slabs and rates are as follows:

Health and Education Cess – 4%

Income Tax Slab for Expats

For the Financial Year of 2019-2020, the tax slabs and rates are as follows :

Income Tax Slab for Freelancers

The income tax slab rates as same for all individuals. For Freelancers, the tax slab and rates are as follows :

Additional Components

1. Surcharge: In case income is more than ₹ 50 lakhs and less than ₹ 1 crore, the surcharge is applicable at a rate of 10% of the income tax. For income more than ₹ 1 crore, a surcharge of 15% is applicable on income tax on the amount exceeding ₹ 1 crore
2. Health and Education Cess: “Education Cess” and “Secondary and Higher Education Cess” will be replaced by “Health and Education Cess” at the rate of 4%, on the amount of tax computed, inclusive of surcharge.

Income Tax Slab for Doctors

The income tax slab rate is same for all the salaried persons residing in India. Income tax slab rate for doctors are as follows:

Plus Surcharge:

• 10% of tax where total income exceeds Rs. 50 lakh
• 15% of tax where total income exceeds Rs. 1 crore
• Health & Education cess: 4% of tax plus surcharge

Income Tax slab for Pensioners

Below mentioned is the income tax slab rate for the pensioners:

Surcharge: 10% of income tax, where total income exceeds Rs.50 lakh up to Rs.1 crore.

Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore.

*Income tax exemption limit for FY 2019-20 is up to Rs. 3,00,000

Frequently Asked Questions

Q- Are income tax slabs same for all individuals?

Yes. Income tax slab rates are the same for all individuals within a specific segment such as those aged less than 60 years, senior citizens (60 years to less than 80 years) and super senior citizens (80 years and above) all feature the same income tax slab rates. This holds true irrespective of whether these individuals are salaried, self-employed, unemployed or freelancers.

Q- Who decides the IT slab rates and can they change?

The income tax slab rates for the applicable financial year are notified by the Finance Act and passed by the parliament every year. As they are notified every year through the Finance Act, slab rates are subject to periodic change. The last time slab rates underwent a change was in FY 2014-15 when the minimum exemption limit was increased to Rs. 2.5 lakh from the earlier Rs. 2 lakh limit.

Q – What is the benefit of having slab rates in income tax as opposed to a single rate of tax as in case of GST?

Income tax is charged on the earnings of an individual whereas GST is charged on the consumption of goods and services. Income tax slab rates are designed to provide relief to those with lower income and maximize tax collection from higher income individuals. This system of taxation which features an increase in rates as the taxation criteria increases is known as progressive taxation. GST on the other hand is consumption-based so those who consume pay more tax and it stands to reason that higher income individuals will consume more and pay more tax through indirect taxes such as GST. Thus in effect both the income tax slab rate system and the GST method lead to the same result just by different routes.

Q- Are there separate slab rates for men and women?

Not anymore. But earlier there indeed were separate slabs for men and women in India. For example for FY 2010-11, the basic exemption limit for men aged up to 65 years was Rs. 1.6 lakh annually while women aged up to 65 years of age had a higher basic exemption limit of Rs. 1.9 lakh. This is no longer the case as for FY 2018-19.

Q – To whom do the current income tax slab rates apply?

Every individual whether a resident or non-resident no matter what his/her age whether salaried, self-employed or unemployed is covered by the applicable income tax slab rate and minimum exemption limit. Additionally, applicable slab rates also cover various non-individuals such as HUF (Hindu Undivided Family), AOPs (Association of Persons), BOIs (Body of Individuals), firms, LLPs (Limited Liability Partnerships), companies, local authority and other artificial judicial persons are also covered by the income tax slab rates.

Q – How do I calculate my tax liability using the slab rate for taxable income of Rs. 5.2 lakh in AY 2019-20 if my age is less than 60 years?

Income tax calculation in AY 2019-20 applies to annual earnings in FY 2018-19. For the applicable AY, basic

exemption limit is Rs. 2.5 lakh, and the slab rate is 5% for income of Rs. 250,001 to Rs. 5 lakh. Income above Rs. 5 lakh will have a 20% tax rate as per IT slabs for AY 2019-20. So you have a tax liability of 20% on Rs. 20,000 = Rs. 4,000. Additionally, 5% tax on 2.5 lakh (Rs. 5 lakh – Rs. 2.5 lakh) = Rs. 12,500. Thus your total tax liability for AY 2019-20 is Rs. 16,500. You can of course get the same result using a free online income tax calculator.

Mutual Fund investors make gains by way of capital appreciation and dividends. The gains you make from your mutual fund investments are taxed.

The tax rates depend on the fund category and the investment holding period. Holding period is the tenure for which an investor stays invested in the mutual fund scheme. The holding period can be short term or long term.

Let’s discuss the taxation applicable with an illustration.

Equity Funds

Equity funds are mutual funds in which at least 65% of the assets are invested in equity and equity related instruments. This includes Equity Linked Savings Scheme (ELSS) as well.

For more about equity mutual funds, read this blog.

Short term capital gain: When the holding period of the investment is up to 1 year, it is considered as short term. Short term capital gains tax of 15% on the gain amount is applicable.

Illustration:

• Shweta invests Rs 10,000 in an Equity Mutual Fund at an NAV of Rs 25 in November 2018.
• She gets 400 units (Rs 10000 divided by Rs 25) allocated.
• NAV grows to Rs 30 by June 2019. The value of her investment is Rs 12,000 (Rs 30 multiplied by 400)
• Shweta redeems the amount and she gets a gain of Rs 2000 (Rs 12,000 minus Rs 10,000)
• STCG will be Rs 300 which is 15% tax on the gain of Rs 2000

Exit load is not considered in the illustration as it may vary from fund to fund

Long term capital gain: When the holding period of the investment is more than 1 year, it is considered as long term. Long term capital gains tax of 10% on the gain amount in excess of Rs 1 lakh is applicable.

Illustration:

• Shweta invests Rs 5,00,000 in an Equity Mutual Fund at an NAV of Rs 25 in November 2012.
• She gets 20,000 units (Rs 5,00,000 divided by Rs 25) allocated.
• NAV grows to Rs 35 by June 2019. The value of her investment is Rs 7,00,000 (Rs 35 multiplied by 20,000)
• Shweta redeems the amount and she gets a gain of Rs 2,00,000 (Rs 7,00,000 minus Rs 5,00,000)
• Shweta has to pay 10% capital gain on the gains exceeding Rs 100,000. In this case, she must pay Rs 10,000 as LTCG ((200000 – 100000) * 10%)

Debt Funds

Debt mutual funds are those that invest in fixed income instruments – such as corporate and government bonds, overnight securities, corporate debt securities, money market instruments etc. These funds are ideal for investors who are averse to risk and seek to generate regular income. For more about debt funds, read this blog.

Short term capital gain: When the holding period of the investment is up to 3 years, it is considered as short term. Short term capital gains tax is applicable as per the income tax slab of the individual.

Illustration:

• Shweta invests Rs 10,000 in a Debt Mutual Fund at a NAV of Rs 25 in November 2018.
• She gets 400 units (Rs 10,000 divided by Rs 25) allocated.
• NAV grows to Rs 31 by June 2021. The value of her investment is Rs 12,400 (Rs 31 multiplied by 400)
• Shweta redeems the amount and she gets a gain of Rs 2400 (Rs 12,400 minus Rs 10,000)
• Assuming she is in the 30% tax bracket, her STCG will be Rs 720 which is 30% tax on the gain of Rs 2400

Exit load is not considered in the illustration as it may vary from fund to fund

Long term capital gain: When the holding period of the investment is more than 3 years, it is considered as long term. Long term capital gains tax of 20% is applicable on the gain amount after taking into consideration the cost of indexation.

Indexation adjusts your investment amount for inflation, and tax on gains are calculated on the adjusted investment amount.

Illustration:

• Shweta invests Rs 50,000 in a Debt Mutual Fund at a NAV of Rs 25 in November 2012.
• She gets 2000 units (Rs 50,000 divided by Rs 25) allocated.
• NAV grows to Rs 35 by Feb 2019. The value of her investment is Rs 70,000 (Rs 35 multiplied by 2000)
• Shweta redeems the amount and she gets a gain of Rs 20,000 (Rs 70,000 minus Rs 50,000)
• Taxes are computed using the Cost Inflation Index (CII)
• The CII for the financial year 2012-2013 was 200 and for 2018-2019 was 280
• Amount invested will be adjusted for inflation and it is recalculated as Rs 70,000 (280/200 * 50,000)
• Shweta has to pay 20% as taxes on the difference between the value at the time of withdrawal and the indexed cost. Tax here will be NIL as the gain is zero (Rs 70,000 – Rs 70,000)

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To summarize

For hybrid mutual funds, those that have at least 65% equity will be taxed as equity mutual funds, and the rest as debt mutual funds.

Dividend income from shares, debt, equity, and other non-equity MF

• Tax is not applicable on dividend income
• However, Mutual Funds deduct the Dividend Distribution Tax (DDT) from the NAV and pay it to the government
• The effective rate of DDT is 29.12% including the surcharge and cess for non-equity funds and 11.64% for equity funds

If you are a resident Indian, TDS (Tax Deducted at Source) will not be applicable when you sell your units. You must declare the income and pay taxes, if any, when you file your returns. If you are a non-resident Indian, while the tax laws remain the same for capital gains, TDS will be deducted, at the applicable rates, when you redeem.

Remember that even when you are switching units from one scheme to another or from the one option to another, or making an STP or a SWP, they will all be considered as redemptions.

Taxes are also one of the many factors you should consider when choosing a mutual fund. Consult a tax or other advisor accordingly.