What is TDS?
TDS stands for tax deducted at source. It was implemented to facilitate the collection of taxes from the source of income itself. Under this concept, a person (deductee) liable to make a payment of a specified nature to any other person (deductee) deducts tax at the source and pays it to the account of the Government of India. A deductor whose income tax has been removed at source would be entitled to a credit of the amount deducted based on Form 26AS or a TDS certificate issued by the payer.
What are mutual funds?
A mutual fund could be a budgetary vehicle that pools shareholders' resources to contribute in securities such as bonds, stocks, cash, advertise rebelliously, and other resources. Mutual funds are supervised by experienced financial professionals who allocate the fund's assets and seek to produce capital gains or income for the fund's investors. The mutual fund's portfolio is structured and maintained to meet the investment objectives in its prospectus.
Mutual funds allow small or individual investors to access professionally managed stocks, bonds, and other portfolios. Each shareholder, therefore, shares in the profits or losses of the fund in proportion. Mutual funds invest in many protections, and performance is typically tracked as the change in the fund's total market capitalization – derived from the aggregate performance of the underlying investments.
Most mutual funds are from larger investment companies such as Fidelity Investments, T. Rowe Price, Vanguard, and Oppenheimer. In addition, a mutual fund includes a finance supervisor, sometimes called its speculation adviser, who is required by law to act within the best interface of shared finance shareholders.
INCOME TAX ON MUTUAL FUNDS
Calculating mutual fund taxes is crucial to comprehend if you invest in mutual funds or plan to do so. Earnings obtained from investing in mutual funds are subject to taxation, and a mutual fund TDS is imposed, similar to most other investment categories. As taxes are difficult to avoid, knowing the income tax on mutual funds rules will be good before you start investing. Knowing the tax implications of mutual funds can be beneficial in managing your investments effectively and reducing your tax expenses. This article will provide a complete understanding of the various facets of mutual funds, specifically regarding income tax and TDS.
Key factors that determine income tax on mutual funds in India
Dividing the concepts of income tax on mutual funds further into smaller pieces makes it easier to understand. So, let's take the first step by looking at three factors that affect the income tax on mutual funds.
Funds Type:
From the point of view of taxation, mutual funds are separated into equity and debt-oriented mutual funds.
Profit generated (Capital Gains or Dividends): When you sell a capital asset, if the price exceeds the cost incurred, the resulting returns are capital gains. In contrast, a dividend is part of the accumulated profits that a mutual fund distributes to investors in the scheme (i.e., dividends do not require the investor to sell assets).
Holding period:
The holding period determines the rate of tax you will pay on your capital gains. The longer the holding period, the less tax you pay. Income tax regulations in India encourage extended holding periods; therefore, holding your investment longer reduces your tax liability.
TDS on mutual fund
- TDS on Mutual fund dividends are applicable at 7.5% for dividends exceeding Rs 5,000.
- TDS on mutual fund applies to dividend payments, dividend reinvestment, and dividend remittance plan.
For investors within the country, TDS does not apply to capital gains.
Capital gains for NRIs are subject to TDS at 30% for STCG and 20% with indexation for LTCG.
Forms 15G / 15H, wherever possible, may be submitted to avoid TDS.
Let's get into more detail on how mutual fund tax calculates dividends and capital gains.
Income tax on mutual funds dividend
The amendment to abolish the dividend distribution tax was introduced by the Finance Act of 2020. Until March 31, 2020, investors were not required to pay any tax on their earnings from mutual funds in the form of dividends. However, the complete sum of dividend earnings is now subject to taxation for the investor, according to the income tax rate categorized under the "income from other sources."
TDS on mutual fund applies to dividends distributed by mutual fund schemes. As per the new amended rules, when a mutual fund distributes dividends to its investors, the AMC must deduct 10% TDS u/s 194K if the total dividend paid during the financial year exceeds ₹ 5000. However, when you pay taxes, you can claim 10% TDS already deducted by the AMC and pay only the balance.
Income tax on mutual funds' capital gains
Mutual fund capital gains tax depends on the types of mutual fund schemes you invest in and how long you hold the units of that scheme. So, based on the option, Let's understand both factors in detail.
First, talk about the terms LTCG(Long Term Capital Gains) and STCG (Short Term Capital Gains) and what they mean. LTCG is a capital gain generated from an asset an investor holds for an extended period (i.e., a long holding period). At the same time, STCG is a capital gain generated from assets held for a relatively shorter period. The terms long and short duration are different for tax purposes for equity and debt programs. For example, equity-oriented schemes must be held for at least 12 months to qualify as a long-term capital gain from mutual funds, while debt-oriented plans require a holding period of 36 months.
Mutual fund tax calculates disclosure in ITR filing.
When you redeem your mutual fund investments, you must disclose the details in the subsequent ITR filing. You will need to provide all the details, including but not limited to the purchase date and sale date.
However, if you have invested through ET Money, you can generate a Capital Gains Statement that automates these calculations. The statement automatically separates your short-term and long-term capital gains, so you don't have to calculate them manually. It is also difficult for investors to calculate tax on investments in mutual funds bought before January 31, 2018, when FM Arun Jaitley introduced the standstill clause. ET Money also takes care of these calculations; you can save time by not having to invest countless hours studying tax regulations through the Internet.
While declaring mutual fund investments in ITR, you will have to select either ITR-2 (if you are a salaried person with capital gains) or ITR-3 (if you earn money from both your business and profession as well. When inputting information about capital gains, you can utilize the ET Money statement and enter details of the date and amount of purchase and sale, transfer expenses, and other information.
