MUTUAL FUND

Mutual Fund returns are calculated by computing appreciation in the value of your investments over a period as compared to the initial investment. The Net Asset Value of Mutual Fund indicates its price and is used in calculating returns for your Mutual Fund investments. Using a mutual fund calculator, you can easily calculate the returns on your mutual fund investment.

By investing in Mutual Funds, an investor can earn returns in the form of capital gains and dividend* income, which are taxable in the hands of the investor.

• A capital gain /loss arises when an investor sells any number of units of Mutual Funds
• An investor receives a dividend in proportion to the number of units held at the time of announcement of dividend, which gets distributed by companies to investors when they earn a surplus.  

Tax on Capital Gains Received from Mutual Funds:

The capital gains depend on the period of holding (short term or long term) and the type of capital asset.

• In the case of Equity Mutual Funds, an investment tenure of less than 1 year (12 months) is a short-term investment. Any investment of over one year is a long-term investment
• Until March 31, 2023, in the case of Debt Mutual Funds, an investment tenure of up to 3 years (36 months) is a short-term investment and any investment of over 3years is considered as long-term. However, from April 01, 2023, capital gains from Debt Mutual Funds purchased on or after April 01, 2023 (i.e. a fund which invests up to 35% of its proceeds in the equity shares of domestic companies) are to be considered as short-term capital gains irrespective of the period of holding.

Equity funds/Equity oriented funds STT should be paid at the time of sale. In case it is not paid, short term capital gains are taxable at slab rate and long term capital gains are taxable at 20% plus surcharge and cess.

Tax on Dividend* Income received from Mutual Funds:

• From April 1, 2020, Mutual Fund dividends are taxable in the hands of investors. The dividend income is taxable under the head “income from other sources” at the applicable income tax slab rate for the financial year
• In addition to such a taxation, the distributor of dividend* income must deduct TDS (tax deducted at source) at a rate of 10%. However, TDS will not be deducted if the total dividend paid by the distributor during the financial year is less than Rs 5,000
• If the investor fails to provide the PAN to the distributor ,TDS will be deducted at a rate of 20%
• For Non-Resident Individuals, TDS is required to be deducted at the rate of 20% subject to the Double Taxation Avoidance Agreement (DTAA), if any.

*As per the Securities and Exchange Board of India’s (SEBI) circular, ‘Dividend Plan’ is renamed as ‘Income Distribution cum Capital Withdrawal Plan’ or ‘IDCW Plans’ with effect from April 1, 2021 .

Selecting a Mutual Fund is a two-step process – selection of the Mutual Fund category and selection of a scheme in that category.

Select the Mutual Fund category on the basis of the investment objective, time horizon and risk tolerance.

After selecting the Mutual Fund category, choose a Mutual Fund scheme within that category on the basis of its relative performance vs benchmark & its category and consistency of performance. The other important aspect in the scheme selection process is the AMC track record, fund manager’s experience, scheme’s Asset Under Management (AUM) & Expense ratio.