Short Term Capital Gain Tax (STCG) on Mutual Funds

What are the Gains of Mutual Funds?

First of all, let us know: What is a mutual fund? Mutual funds are a tool that takes money from investors, invests it in various funds, and then pays investors a return. The goal of investing in mutual funds depends on the investor's requirements and the financial institution's experience.

Mutual funds offer two types of returns:

• Capital gains

• Dividends

An individual's profit from the sale or transfer of an asset is referred to as a capital gain from mutual funds. On the other hand, a dividend is the income that is received when the underlying assets in mutual funds provide interest or earnings.

For tax purposes, capital gains on mutual funds are taxed at the hands of investors, while the Dividends Distribution Funds (DDT) tax, which is imposed on fund companies on behalf of investors, is applied to dividends on mutual funds.

Depending on how long the funds were held, the capital gains from the transfer of different mutual fund types can now be divided into long-term and short-term gains. Mutual funds with a holding period of less than 12 months (or 36 months in some situations) are subject to short-term capital gain tax.

However, it is essential to comprehend the many varieties of Mutual Funds and the capital gains produced from them in order to comprehend the tax implications of Mutual Funds.

How are Short-Term Capital Gains Taxed?

The earnings made from a short-term investment in a mutual fund, whether it be an equity fund or a debt fund, are short-term capital gains.

65% of equity plan investments are made in equity funds. However, the investment turns into a debt fund when the equity portion is less than 65%. Debt mutual funds invest in corporate bonds, treasury bills, government securities, etc., whereas equity mutual funds are plans that hold shares and stocks. The short-term capital gains from debt funds are not subject to Section 111A taxation, in contrast to the short-term capital gains from equity funds.

Tax rates for equity funds and debt funds are different. The mutual fund's short-term capital gain tax rate for equity funds is 15%. Short-term capital gains on non-equity assets, however, are taxed at the investor's individual income tax rate. A shareholder can offset recent capital losses with recent and future capital gains.

Finding out how much tax you would owe is just as important as researching the returns of the funds you intend to invest in.

Equity Mutual Funds and Their Taxability

Equity mutual funds are those that invest primarily in stocks and shares of different companies. Due to their share investments in businesses with varying market capitalizations, these mutual funds typically produce larger returns than other Mutual Funds.

For taxation purposes, it is now possible to segregate the short-term capital gains from the transfer of equity-oriented mutual funds into two groups. These include

• The short-term gains from the transfer or sale of equity-oriented mutual funds that are subject to STT fees and sold on any recognized stock exchange, such as the NSE or BSE. The Income Tax Act's Section 111A governs the taxation of these monies.

• The profits are made from selling or transferring money that isn't traded on a recognized stock exchange. These gains are taken into account when an investor files their income tax returns and are taxed in accordance with their tax bracket.

Conclusion

Overall, mutual fund investors must comprehend short-term capital gain tax. It is applicable when selling mutual fund shares within a predetermined time frame. The taxation laws for short-term gains vary between equity mutual funds and debt mutual funds. Debt funds are taxed according to the investor's income tax bracket, while equity funds are taxed at a flat rate of 15%.

When making investment plans, it's critical to take these tax effects into account. Consider consulting Kotak Securities, a reputable name in financial services, for knowledgeable advice on best mutual funds investments and tax issues. You can make judgments for a secure financial future using their knowledge.