Mutual Fund Investors: Know taxes impacting your returns

Mutual fund investors need to take in to account plethora of tax rates to understand the post tax returns.  In addition to separate rates for short term and long term capital gains, the rates varies amongst equity, debt and liquid funds.  Then one needs to take in to account dividend distribution tax (DDT) on dividends received.  Again it varies based on whether dividend is from equity fund or debt fund or liquid fund.  Further one also needs to factor in securities transaction tax (STT) to calculate correct post tax returns.  For liquid and debt funds, the effective tax rate can have a significant bearing on the overall returns on the investment.    

To help you to guide through this maze of tax rates, Bachhat has tried to list down the applicable rates for resident individual investors, HUFs as well as non-resident individual investors for the financial year 2012-13.

Capital Gains Tax 

Capital gains tax arises when one redeems the mutual fund.  If mutual fund units are sold within one year from the date of its purchase, the gain is treated as short term in nature.  Otherwise it is considered as long term in nature.  

The tax rates on sale of mutual fund investments for resident individuals, HUFs and non-resident individuals are as under:

Nature of Capital Gains	Equity Funds*	Other Funds
Short Term	15.45% (15% + 3% education cess)	I.T. rate applicable for slab + 3% education cess
Long Term	no tax	20% with indexation (10% without indexation) + 3% education cess)
Securities Transaction Tax	0.25% of sale value	not applicable

*Equity funds are the funds where more than 65% of the scheme AUM is invested in equity securities of domestic companies.

Gains for non-resident individuals are subject to tax deduction at source (TDS) as follows:

Type of funds	TDS Rate
Equity Funds	15.45% for short term cap gains, NIL for long term cap gains
Other Funds	30.90% for short term cap gains and 20.6% for long term cap gains after providing for indexation benefit

Dividend Distribution Tax (DDT)

This is the tax paid by the mutual fund companies at the time of payment of dividend to investors.  Since the amount is paid from the corpus of the fund, it leads to reduction in net asset value of the fund.  The DDT rate for resident individuals ,  HUFs and non-resident individuals is the same.

Type of Mutual Funds	DDT Rate
Equity Funds	no tax
Liquid Funds / Money Market Mutual Funds	25% + 5% surcharge + 3% education cess (effective tax rate of 27.0375%)
Any other mutual funds	12.5% + 5% surcharge + 3% education cess (effective tax rate of 13.51875%)

One need to take in to account the above tax impact while deciding on mutual fund investments and comparing it with other investment alternatives.

Bachhat has tried to cover all applicable tax implications for retail investors in mutual funds.  In case anything is missed out, do let me know via comments section so that the same can be incorporated.