Mutual funds has the potential to give you inflation beating returns.
Let’s understand the income tax you have to pay on gains from mutual funds.
1. A mutual fund scheme is considered as equity fund (be it balanced funds or arbitrage fund) if it invests 65% or more of its portfolio in equities or equity related instruments. Profit held for more than 12 months, in these funds,be it through SIP or lumpsum, is considered as long term capital gain and thus no tax is applicable on them.
For less than 12 months, tax on short-term capital gains is applicable at 15% on the gains from equity funds.
2. Debt fund investments are considered long term if they are held for more than 3 years. Long term capital gain on debt funds, at present, is taxed at the rate of 20%. However, investors get the benefit of indexation on their original debt fund investment. After factoring in inflation, long term capital gains tax comes to negligible levels. But if investments are redeemed before 3 years, short term gains will be taxed as per your income tax slab.
3.Many investors opt for dividend option while investing. Dividend income from any fund is tax free in the hands of investors, irrespective of the period of investment. However, fund houses pay dividend distribution firstname.lastname@example.org% before handing out the dividends to investors.