What You Should Know About Taxes on Your Investments
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.
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.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more