What You Should Know About Taxes on Your Investments

With growing financial awareness, you will have realised the importance of investing. But amid the rush to generate higher returns, taxation is often overlooked. Understanding the basics of taxation on investments is the first step to maximising potential returns, and protecting yourself from tax notices and the other severe consequences of misfiling taxes or unintentionally hiding information.
Jan 2023
3 mins read

Here are some important things you should know about income tax on mutual funds and stock investments in particular:

Understanding capital gains
Capital gain is any increase in a capital asset's value at the time of selling. In other words, every time you sell an asset for a price higher than what you paid at the time of purchasing, you generate capital gains. Whenever you invest (in mutual funds, for example), the primary objective is to generate profits. For that, you would want the Net Asset Value (NAV) of the scheme to be higher than the purchase price at the time of selling. Taxes on these capital gains deserve your utmost attention

How are capital gains taxed in India?
Capital gains are divided into Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG). Both are taxed differently. Moreover, the type of gains and subsequent taxes also vary based on whether you invest in equity or non-equity instruments.

  • LTCG Taxation – for equity-based investments, LTCG tax is applicable for assets held for over 12 months . For non-equity-based investments, you will be required to pay LTCG tax for investments held for over 36 months .
  • STCG Taxation – for equity-based investments, STCG tax is applicable for investments held for less than 12 months. For non-equity-based investments, STCG tax is applicable if the investment is held for less than 36 months

The Long-Term Capital Gain tax rate on equity mutual funds is 10% for gains above Rs. 1 lakh. The rate on non-equity mutual funds is 20% but with indexation benefit. The Short-Term Capital Gain tax rate on equity funds is 15%. The rate on non-equity mutual funds is as per the nominal tax slab of an Individual / HUF. (Surcharge and Cess as applicable)

What is an indexation benefit?
Indexation allows you to adjust the purchase price according to the Cost Inflation Index (CII) published by the tax authorities. For instance, if you generated an LTCG of Rs. 50,000 in Fiscal year (FY) 2021 by selling units of a debt mutual fund you invested in FY 2015, rather than paying 20% LTCG tax on Rs. 50,000, the indexation benefit will allow you to recalculate the profits as per the CII, to make up for the inflation during these six years, to reduce your tax liabilities.

What are tax-saving mutual funds?
ELSS or Equity Linked Savings Scheme, popularly known as a tax-saving fund, is the only mutual fund category eligible for Section 80C deductions under IT Act. Investments of up to Rs. 1.5 lakh in an ELSS fund in a financial year are eligible for tax deductions. These are equity funds, with the majority of investments made in equity and equity-related securities while the rest are invested in debt assets. However, you will have to remain invested in the tax-saver scheme for at least three years to claim the tax deductions since there is a lock-in for the period.

Understanding taxes on dividends and share transactions
Another way of generating income from stock investments is through dividends. Apart from direct stock investments, equity mutual fund schemes also offer dividend options. In the past, companies that declared dividends were required to pay DDT (Dividend Distribution Tax). The dividends were tax-free in the hands of the investors – but not anymore.
After the amendments in Budget 2020, all dividends received by investors are added to their taxable income and taxed as per their tax slab. There is also the Securities Transaction Tax, or STT. Investors are liable to pay STT of 0.1% when buying and selling shares. An STT of 0.001% is applicable when buying and selling equity-oriented mutual funds. There is no STT tax on debt mutual funds.

What if there are capital losses?
As you know, it is not always possible to generate profits from every investment. You may have to book losses in some cases. All of these short-term capital losses can be set off against capital gains for up to eight consecutive years. After the introduction of the LTCG tax at 10% for equity investments, even long-term capital losses can be set off against long-term capital gains. Capital losses (short-term or long-term) cannot be set off against any other head of income such as salary, rent or interest. Long-term capital losses can be set off only against long-term capital gains. But short-term capital losses can be set off against short-term or long-term capital gains

PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
Toll Free Number: 1800 266 7446
Email: care@pgimindia.co.in
This is an Investor Education and Awareness Initiative by PGIM India Mutual Fund.
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
The information contained herein is provided by PGIM India Asset Management Private Limited (the AMC) on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, the AMC cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance* (or such earlier date as referenced herein) and is subject to change without notice. The AMC has no obligation to update any or all of such information; nor does the AMC make any express or implied warranties or representations as to its completeness or accuracy. There can be no assurance that any forecast made herein will be actually realized. These materials do not take into account individual investor's objectives, needs or circumstances or the suitability of any securities, financial instruments or investment strategies described herein for particular investor. Hence, each investor is advised to consult his or her own professional investment / tax advisor / consultant for advice in this regard. The information contained herein is provided on the basis of and subject to the explanations, caveats and warnings set out elsewhere herein. The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisions regarding investment/ disinvestment in securities market and/or suitability of the fund based on their specific investment objectives and financial positions and using such independent advisors as they believe necessary.