A lesson in mutual fund investment

Dec 24 2012, 11:42 IST
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Mutual funds are one of the most preferred vehicles of investment. (Reuters) Mutual funds are one of the most preferred vehicles of investment. (Reuters)
SummaryMutual funds are one of the most preferred vehicles of investment.

Mutual funds are one of the most preferred vehicles of investment for the kind of appreciation and ease of investing it offers. Exposure to any kind of financial instrument like equities, debt or any money market instrument is possible through Mutual Funds. Before deciding on investing in MFs, ponder upon the tax provisions for the particular category and see if it suits your portfolio.

Tax implications on mutual funds arise on two occasions: Dividend paid out by mutual fund and gains arising from sale of mutual funds.

Equity Mutual Funds

Equity mutual funds are found in the portfolio of most investors. Within the umbrella of equity mutual funds, there are many sub categories like the Large-cap fund, Mid-cap fund, Blue Chip funds, Small-cap funds, etc. An equity scheme is one which holds at least 65 per cent of its exposure to equity. To avail tax benefits the equity holdings cannot fall below this level. However, the tax treatment remains same for investors of all categories of equity mutual funds.

Dividend payout: Dividend received by a mutual fund is not taxed in the hands of an investor or the mutual fund company.

Short-term gains: When mutual fund units are sold before the completion of one year, the gain made is called as short-term capital gain. This is taxed at the rate of 15 per cent irrespective of the income tax slab that you fall under. A 3 per cent cess is also levied bringing the tax rate to 15.45 per cent.

Long-term gains (LTCG): If the units in equity mutual funds are sold after a holding period of one year, the gain made is Long-term capital gain. LTCG in case of equity mutual fund is exempt from tax.

Debt Mutual Funds

The tax structure for debt mutual funds varies quite a bit from the equity mutual funds.

Dividend payout: The dividend income is not taxable in the hands of the unit holder. However, the mutual fund house needs to pay a dividend distribution tax of 13.519 per cent (12.5 per cent + 5 per cent surcharge + 3 per cent cess) before payment of dividend to its investors. Though this tax is to be paid by the mutual fund, it is passed over to the investor.

Short-term capital gains: The holding criteria for debt mutual fund remain same as in equity-oriented funds. Any gain realised before the end of one year is added to the

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