One thing that comes to every investor’s mind apart from the return and related risk is the associated tax compliances. The last time we checked 2 types of taxes were applicable on sale of mutual funds i.e. capital gains (under Income Tax Act) and dividend distribution tax (DDT).
If any investor holds a mutual funds unit of the scheme for a period of up to one year, provisions of short-term capital gain (STCG) are applicable on the sales proceeds. The applicable tax rate on such securities is 15%. So, if you have a unit of mutual funds that you sell within a year, you are liable to pay 15% as tax of the capital gain on sale proceeds for that financial year.
However, if the investor holds the units of the mutual fund scheme for a period exceeding one year, then the capital gains earned by you are called long-term capital gains (LTCG). LTCG above Rs.1 lakh is taxed at 10% without indexation benefits.
Dividend Distribution Tax (DDT)
On mutual funds, dividend distribution tax is applicable at 10%. Dividend distribution tax is applicable on dividend receipts. This amount is taxable in the hands of the corporates. The corporates deduct the dividend distribution tax before giving any dividends to its investors. The investors do not have to pay anything as it has been already deducted. Therefore, there is no need for investors to pay additional dividend distribution tax on dividends received on their investment.
It could be concluded that on a mutual funds unit held for 1 year or less, the applicable tax rate is 15% on total gain. Whereas, in cases where mutual funds have been held for more than 1 year, a tax rate of 10% is applicable on total gains. Also, dividend distribution tax is applicable at 10% which is automatically deducted from the dividends and paid by the corporates.