How are mutual funds taxed? (And how you can save tax)

Investing in mutual funds is a wise way to grow your wealth. But let's be honest, the world of taxes can be a mind-boggling maze, and mutual funds come with their own set of rules. Don't worry, though! This blog is your map to understanding mutual fund taxation and uncovering clever ways to save tax as you invest in mutual funds online.

First things first, let's break down the fundamentals

Equity Funds: These invest in stocks, and tax rules differ based on the holding period. Gains from selling units held for less than a year are taxed at 15% (short-term capital gains), while gains from units held for over a year enjoy the benefit of Long-Term Capital Gains (LTCG) tax, where the first ₹1 lakh is tax-free and any gains above that are taxed at 10%.

Debt Funds: These invest in bonds and debt instruments. Gains from selling units held for less than 3 years are taxed according to your income slab, while gains from units held for over 3 years are taxed as LTCG at 20% with indexation benefits (adjusting for inflation).

Now, let's talk about tax-saving avenues

Invest in ELSS (Equity Linked Savings Scheme) funds: These are equity funds with a lock-in period of 3 years, but they come with a double whammy – tax deduction on your invested amount (up to ₹1.5 lakh under Section 80C) and LTCG benefits after the lock-in period. It's like a tax-saving superhero in the mutual fund world!

Utilise Tax Loss Harvesting: Have some underperforming funds? Sell them at a loss to offset gains from other mutual funds and reduce your taxable income. Remember, timing is key, so consult a financial advisor for optimal results. And more importantly, make sure the losses are not more than the tax applicable.

Choose Growth over Dividend Distribution Plans (DDPs): DDPs distribute dividends, which are taxed at your income slab rate. Opting for the growth option allows your gains to compound tax-free until you sell the units. 

Stay invested for the long term: Short-term gains are taxed at a higher rate. Give your investments time to grow and enjoy the benefits of long-term capital gain tax rates. Moreover, you also have the benefit of the power of compounding when you invest for a longer horizon. 

Important note: Remember, tax rules can change. Stay updated with the latest regulations and consult a financial advisor for personalised tax-saving strategies.

Investing in mutual funds doesn't have to be a tax headache. With a little knowledge and these clever tricks, you can navigate the tax maze and maximise your returns. If you want to understand how your investments will fare based on how you invest, whether lump sum or SIP, you can explore our lumpsum investment calculator or the SIP returns calculator.

If you are looking for a trustworthy guide on your mutual fund journey, Ventura is here for you. We offer a user-friendly platform, diverse investment options, and expert guidance to help you make informed decisions and optimise your tax benefits.