Taxation On Dividend Income Of Different Mutual Fund Investments
If you have invested in mutual funds, you can opt for receiving dividend payout. This will ensure you get regular income as long as you stay invested, depending on the profit earned by a company. However, dividend income is liable to taxation.
As per the Finance Act of 2020, income from dividend is taxable in the hands of the shareholders and not the company paying it.
Read on to know more about tax in dividend income!
According to the Finance Act of 2020, companies would no longer be paying a Dividend Distribution Tax (DDT) for dividends paid on or after April 1, 2020. Instead, it will be taxable as per the tax slab rate the investor falls within.
In addition, the company paying a dividend will now deduct a TDS on your dividend income. If the aggregate dividends exceed Rs. 5,000 in a year from all schemes of the same fund house, they will deduct 10% tax on dividends. However, if your income is below the minimum taxable income or if you fall within the 5% tax bracket, you can claim the TDS back.
Notably, you can also claim a deduction on the interest that you pay for the amount you borrow for investment. However, this deduction cannot be more than 20% of the gross dividend.
Taxation on Capital Gains of Mutual Funds
Capital gains tax is the profits gained when redeeming/selling units of mutual funds. It depends on the holding period of your mutual fund investment and the type of fund. This holding period is the duration of investment from purchase to the sale of mutual fund units.
If you hold listed equity shares for less than 1 year, your capital gains are STCG (short-term capital gains) and a 15% tax will be levied on the dividend income. If you redeem shares after 12 months, these gains are LTCG (long-term capital gains). You can claim up to Rs. 1 lakh tax exemption. Any amount over Rs. 1 lakh will be taxed at 10%.
For unlisted domestic equity shares and foreign equity shares, the applicable holding period is 24 months. Debt funds and debt-oriented funds must be held for at least 3 years (36 months) for LTCG to be applicable and less than 36 months for STCG.
Also Read: Taxation In Mutual Funds
Taxation on Equity Mutual Funds
Equity mutual funds invest a minimum of 65% of their corpus in stocks of Indian companies listed on stock exchanges in the country.
Taxation rules for equity funds are the same as that of domestic stocks. STCG is taxed at a flat 15% rate, regardless of your income tax bracket. LTCG applies for mutual funds held for over 12 months at a 10% rate without indexation. LTCG tax is applicable only when your cumulative capital gains in a financial year exceeds Rs. 1,00,000.
For investments in equity funds made before January 31 2018, the profits till that day are grandfathered, and NAV (Net Asset Value) on that day is taken for computing LTCG. Surcharges are applicable for individuals and companies on income above Rs. 50 lakh. A health and education cess of 4% is also chargeable for all taxes.
Taxation on Debt Mutual Funds
Debt mutual funds invest a minimum of 65% of their corpus in debt instruments such as corporate bonds, T-bills and certificate of deposits. The tax rates for all mutual funds that do not fall under the equity funds category are the same. This includes debt funds, gold funds, gold ETFs and international funds.
Capital gains from these non-equity funds with a holding period of less than 3 years are STCG. Your taxable income must include these gains, and the taxation depends on your income tax slab rate. On the other hand, LTCG taxes apply at a flat 20% rate after the benefit of indexation.
Taxation on Hybrid Mutual Funds
As per SEBI’s regulations, hybrid funds are those mutual funds that invest in 2 or more asset classes, such as equity, debt and gold.
The taxability of a hybrid fund that invests 65% or more of its corpus in equity and equity-related instruments is the same as equity funds. Similarly, those with less than 65% of investment in equities are taxed in a similar way to debt funds. Aggressive hybrid funds fall into the former category, while conservative hybrid funds belong to the latter.
How Mutual Funds Earn Returns For Investors?
Profits or losses from mutual funds depend on the performance of underlying stocks and bonds in the portfolio. There are two types of returns from mutual funds:
- Income from stock dividends
A mutual fund earns income from dividends of its underlying stocks if there are any. When companies have surplus cash, they may share it with investors. A mutual fund company funds its owners by distributing these dividends.
Investors choose to receive the dividends or reinvest the earnings to buy more units of the mutual fund. Interest income from bonds is also included in a fund’s portfolio.
- Income from capital gains
Capital gains refer to the profits realised upon selling the securities at a higher selling price than the purchase price. If a mutual fund’s price appreciates, investors can sell their mutual fund units for profits in the market.
Depending on the type of mutual fund, fund managers can also sell securities that have increased in value. Profits gained from such sales are then transferred to the investors.
Also Read: Stocks Vs Mutual Funds
Final Word
Various taxes apply on dividend returns of the mutual funds. The tax on dividend income depends on the individual’s income tax slab, LTCG tax for both equity funds and debt funds apply at a flat rate. This makes long-term investment more tax-efficient and useful for those in the higher income tax bracket.
FAQs on Dividend Income Taxability
Indexation increases the purchase price of assets to reflect the effects of inflation. This leads to lower capital gains, which reduces your taxable income. Indexation benefits make debt funds more tax-efficient than FDs and other savings schemes.
Taxation on investments made via a Systematic Investment Plan (SIP) depends on the holding period of each instalment and the type of mutual fund. Each SIP is a separate investment and its holding period starts from the date of instalment to the date of redemption.
Securities Transaction Tax (STT) applies when you sell units of an equity-oriented fund on stock exchanges or when the mutual fund house repurchases it. The Ministry of Finance levies 0.001% or 0.025% STT on the sale of equity or equity-oriented funds. It does not apply to the purchase of equity funds or the sale of non-equity funds.
Yes, investments in ELSS (Equity Linked Savings Schemes) mutual funds qualify for tax deductions under Section 80C of the Income Tax Act. Investors can get a maximum tax deduction of up to Rs. 1.5 lakh under this Section.
The following are the mutual funds that fall under non-equity funds:
Hybrid funds with less than 65% equity exposure
Gold ETFs, Bond ETFs and Liquid ETFs
Fund of funds (both domestic and international)
Infrastructure debt funds
All debt funds such as gilt funds, liquid funds, overnight funds, money market funds, etc.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
