Fixed Income Mutual funds taxation for the financial Year 2016-2017
Capital Gains Taxation
Long Term Capital Gains – Units held for more than 36 months
Short Term Capital Gains -Units held for less than 36 months
TDS Applicable only to NRI Investors
Dividend Distribution Tax –Deducted by Mutual funds
Dividend in the hands of all categories of investors is tax-free.
Indexation Benefits – Long term capital gains
Debt mutual funds have to be held for 36 months to avail of 20% long term capital gains tax benefits. Post inflation indexation, tax liability will be lower.
How does this work? For example if inflation index was 100 at time of investment and at end of 36 months, the index has grown to 119 assuming 6% average annual inflation, the cost of Rs 100 invested in a bond fund would go up to Rs 119. Hence, if the earnings from the bond fund was Rs 129.5 @9% CAGR, the tax payable is 20% on Rs 10.5, which is Rs 2.08. Post tax returns on the bond fund held for 36 months is 8.4%.
Advantage of bond funds over bonds is that coupon payments are taxed at base tax rate while bonds funds with cumulative growth options held for three years are taxed at 20% capital gains tax with indexation benefits.