Mutual Fund Taxation – AY Year 2021-2022 ( FY 2020-2021)
Mutual Fund Taxation some changes took place in budget 2020. Here in this article, I will explain taxation for FY 2020-2021, ay 2021-2022.
The taxation of mutual funds will depend on 3 factors.
3 Factors that will decide Mutual Fund TAxation are…
1) Resident Status of You i.e Resident or Non-Resident ( NRI)…
The tax that you have to pay will be different if you are resident Indian, the tax treatment will be different and if you are an NRI, your tax will be different from Resident Indian.
2) The tax also depends on the types of mutual funds that You have invested ( Equity or Debt…
In mutual funds, if the tax rate will differ from the type of scheme that you have invested.
For example, equity-oriented mutual funds tax is different from that of debt mutual funds.
The funds that have 65% or more equity exposure are considered as equity mutual oriented mutual funds.
Examples of equity-oriented mutual funds are large-cap, mid-cap, small-cap, multi-cap, aggressive hybrid funds, equity arbitrage funds, etc.
Whereas funds that have less than 65% of equity exposure are called debt oriented mutual funds. ( Hybrid Funds)
In addition, The funds which have zero equity are called pure debt funds.
Examples of Non-Equity and Pure debt funds are liquid funds, arbitrage funds, gold funds, funds of funds low duration funds, gilt funds, dynamic bond funds, and international equity funds.
But the International equity funds have equity exposure more than 65%, they are considered as debt funds for tax purposes.
3) Holding Period of Investment in the mutual fund also decides the tax…
In mutual funds, there are two types of gains.
- Short Term Capital Gain ( STCG).
- Long Term Capital Gain(LTCG).
In addition this the holding period for STCG and LTCG for equity and non- equity funds are different
STCG will arise in equity mutual funds if the holding period is less than a year.
In addition, LTCG will arise in equity mutual funds if the holding period is more than a year.
Whereas in Non – Equity mutual funds the STCG will arise, if the holding period of investment is less than a year.
In addition, If the holding period in Non- Equity mutual funds is more than a year, then LTCG has to be paid.
I think now you understood about LTCG and STCG.
Now, Let’s learn more about mutual fund taxation and tax rates.
Abolition of Dividend Distribution Tax on mutual fund dividends(DDT)…
In Budget 2020, DDT has been removed.
Earlier, Mutual fund companies used to pay the Dividend Distribution Tax on the dividends that pay to the investors.
Mutual funds used to pay 11.648% as DDT ( i.e Actual DDT 10% + 12% Surcharge + 4% Cess).
Whereas in Non- Equity Mutual funds DDT was 29.12% ( Actual DDT 25% + 12% Surcharge + 4% Cess).
Mutual Fund companies used to pay about DDT.
As a result of this investors were not paying any tax on the dividends, they receive earlier.
But, with the abolition of DDT by mutual funds, Investors required to pay tax on the dividends that they receive as per their tax slabs.
Introduction of Section 194k and TDS for mutual fund dividend…
In Budget 2020, Section 194k introduced for mutual fund dividend income.
According to this section, Mutual Fund companies have to deduct 10% TDS on the mutual fund dividend income.
However, the TDS will be deducted only if it crosses Rs.5,000 in a Financial year.
But, there is no TDS on the mutual funds capital gains ( short term or long term).
In case if you are in 30% slab and the TDS deducted is 10% on the dividend, then while filling I.T return, you have to pay the balance 20% as tax.
As the dividend income is taxable as per your tax slab.
If you see the above image, there is no change in the capital gain tax rates in this budget.
But a surcharge of 15% will be levied if the income of individual/Huf is more than 1 crore.
However, this surcharge will be 10% only if the individual/Huf is more than 50 lakh but not more than 1 crore.
In addition, 4% of Health and Education Cess will be added to tax and Surcharge.
Mutual Fund Taxation of Dividend income…
Now, there is no DDT on Mutual Funds Dividend income from Financial Year 2020-2021.
As a result of this for both equity and non-equity oriented mutual funds, NRI and Resident Individuals have to pay tax on dividend income as per their individual tax slab rates.
Again, as I said above, if the dividend income is more than Rs.5,000 in a Financial Year, then a TDS of 10% will be deducted.
In addition to the above tax rates for both growth and for the dividend option in mutual funds, Security Transaction Tax also will be added.
What are the TDS Rates for NRI Mutual Fund Investors for A.Y 2021-2022 ( Fy 2020-2021)?…
Conclusion about Mutual Fund Taxation…
- If you are in 10% tax slab, then the dividend option is better for you, as the STCG for growth option is 15%.
- In case you are in 20% or 30% tax slab, then the growth option is a better option.
- If you are investing in debt funds for the short term, then both growth and dividend options will be charged at the same rate.
- For low tax bracket investors in debt funds who are investing for long term, the dividend option may be good, as the rate in growth option is 20% with indexation, while in dividend option it is as per the tax slab.
However, I recommend you opt for only the growth option investor.
As it will be difficult to track the investments and file the Income Tax Return.