Investing money often becomes an overwhelming task for many people. It is because there are many financial instruments in the market, from equities to bonds and treasury bills. Irrespective of the instruments you select, never undermine the impact of market conditions on your investment portfolio. One way to minimize the risk factor is to pool your money through one instrument – mutual funds. Managers of chosen mutual funds will generate income by allocating assets within the fund. Investing through mutual funds via a SIP investment plan or in lump sum comes with the benefits of built-in diversification, professional management and tax savings.

Many financial planning experts agree that mutual fund taxation is a complex subject. It is not just related to the capital appreciation potential of mutual funds. So, it is crucial to know about several facets that determine the tax implications before you invest through mutual funds via SIP investment plan or at one go.

Mutual Funds Holding Period

Holding period is the tenure for which you keep your money invested in the chosen mutual funds. Seasoned investors usually invest through mutual funds for a longer tenure to create wealth as well as to get tax benefits. The tax implications of investing through mutual funds, be it through a SIP investment plan or lump sum, depend on the holding period.

Other Important Facts Related to Holding Period and Taxation

- Long-term holding period for equity mutual funds means you stay invested in the funds for 12 months or more.

- For debt funds, your investment is considered long-term if the holding period is three years or more.

- For taxation purposes, hybrid funds that have an equity exposure of more than 65% are considered equity funds. Similarly, if the equity exposure is less than 65%, then they are considered debt funds.

Type of Funds Short-Term Investment Long-Term Investment
Equity Funds Less than a year One year or more
Equity-oriented balanced funds Less than a year One year or more
Debt-oriented balanced funds Less than three years Three years or more
Debt Funds Less than three years Three years or more

- Long Term Capital Gains (LTCG) tax is applicable on equity funds provided the gains go beyond one lakh rupees per year. Also, you won’t get any benefit of indexation – the process with which you can adjust the price of your investment toindicate the impact of inflation on it.

- While most of the regular funds do not have a lock-in period, Equity Linked Savings Scheme (ELSS) comes with a lock-in period of three years. However, your ELSS investment is eligible for tax exemption under Section 80C.

- LTCG on debt funds is taxable at the rate of 20% after indexation, which brings down the overall capital gains.

- Short Term Capital Gains (STCG) on debt funds add to your total income and are taxed as per the tax slabs your income falls in.

- For your SIP investment plan, the tax calculation is done on a pro-rata basis. In case you choose more than one SIP investment plans, each investment is considered a new investment, which makes it subjected to taxes.

- Whenever you choose to sell the units of an equity fund or a hybrid equity-oriented fund, you have to pay another tax, known as Securities Transaction Tax (STT), at the rate of 0.001%. Selling debt fund units is exempted from paying this tax.

The simplest taxation principle of mutual funds you should understand is that the longer you keep mutual fund units you have bought, the more tax benefits you will get. If you need help in understanding mutual fund taxation rules, seek advice from a financial advisor like FinEdge. A professional advisor by your side can simplify your taxes.