STCG – Short Term Capital Gain Tax on Mutual Fund
Investing in Mutual funds has emerged as a popular and efficient choice for Indian investors. As per the data furnished by the Association of Mutual Funds in India (AMFI), the total Assets under Management (AUM) for the Indian mutual fund industry amounted to INR 31.43 lakh crores as of August 31, 2021. This staggering figure justifies the necessity for comprehending the tax implications related to our mutual fund investments. Among the various taxes levied on mutual fund investments, Short Term Capital Gains tax retains a prominent role. This tax is instituted on the profit yielded from the sale of mutual fund units held for a short duration.
The scope of Short Term Capital Gains Tax:
As per the Indian Income Tax Act, if an investor sells their equity or debt mutual fund units within a span of one year from the date of investment, the profit earned is treated as a short-term capital gain. This income is liable to be taxed under the heading “Income from Capital Gains”.
In the case of equity mutual funds, the STCG tax rate is 15%, irrespective of your income slab. However, for debt mutual funds, the tax rate depends on the investor’s tax slab. The income from interest and dividends, usually known as coupon payments, is also included in calculating the STCG tax.
The STCG tax’s relationship with Section 80C:
According to the Indian Income Tax Act, section 80C offers provisions for tax exemptions. Investments such as Public Provident Fund (PPF), National Savings Certificate (NSC), and Tax Saving Fixed Deposits qualify for tax deductions under this section. Equity Linked Savings Scheme (ELSS) is the only type of mutual fund that reaps the benefits of Section 80C.
Investments in ELSS are eligible for a tax deduction of up to INR 1,50,000 under Section 80C. However, the STCG tax differentiates ELSS from other mutual funds. Despite falling under the shelter of Section 80C, ELSS is still subjected to the STCG tax of 15% if redeemed within a year of investment.
In a Nutshell:
An investor planning to sell their investment in less than one year should be prepared to pay STCG tax. This tax is applied on the gains made from the sale and not on the entire amount obtained. For example, if you invest INR 100,000 in an equity mutual fund and gain INR 110,000 from selling the units within a year, you’ll pay a STCG tax on the profit of INR 10,000. In this case, your STCG tax would be INR 1500 (15% of INR 10,000).
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While the 15% STCG tax might not seem cumbersome, it’s essential to consider how it could impact your long-term financial planning. Losing even 15% of your gains could dent your mutual fund returns significantly, thereby affecting your wealth accumulation.
Disclaimer:
The taxation rules related to mutual funds are subject to periodic amendments and alterations by the Indian government. Therefore it is advisable to remain updated with the latest tax laws and learn from a financial advisor when needed. Investors must assess the benefits and drawbacks accurately before trading in the Indian financial market.
Summary:
The Short-Term Capital Gains (STCG) tax on mutual funds is applicable on the sale of units within one year of investment. This tax is contingent on the type of fund, with rates being 15% for equity mutual funds, while for debt funds, it depends on the individual’s income tax slab. Section 80C of the Income Tax Act provides relief with tax deductions of up to INR 1.50 lakh per annum; however, the returns from ELSS funds even under Section 80C are still subject to STCG tax. Understanding STCG tax and its impact is essential for prudent financial planning. It is always advisable to consult a financial advisor and be updated with current tax laws before investing in the Indian financial market.