Gains on investments in assets such as shares and mutual funds are taxable. Dont take it lightly to tax income from shares and Mutual Fund just like other income. Equity shares are considered capital assets under the Income Tax Rules. As a result, Income Tax on equity shares profit is based on how long they’ve been held.
Income Tax on equity shares
A holding duration of more than 12 months is considered long term in order make gains from equity shares to be taxable. In other words, if you maintain your equity stock investment for more than a year, you will be subject to long-term capital gain tax.
Gains on equity shares held for less than 12 months are called short-term capital gains and are taxed accordingly.
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1. Long term capital gain on equity shares
On gains above Rs 1 lakh in a financial year, long-term capital gains are taxed at a rate of 10% plus cess and surcharge, with no indexation. There are three things to keep in mind here:
- Rs 1 lakh limit includes any gains from equities mutual funds, if any.
- Gains of up to Rs 1 lakh are tax-free.
- Beginning from Financial Year 2020-2021, dividend income from equities is taxed at the applicable slab rate.
2. Short term capital gain on equity shares
Short-term capital gains are taxed at a rate of 15%, plus a surcharge and a cess.
Read Also: Income Tax on sale of listed shares in short term : Capital gain
Income Tax on Mutual Funds
1. Equity Mutual Funds
The same rules apply to equity mutual funds as they do to equity shares. You will be taxed at 15% plus cess and surcharge on short-term capital gains on equity mutual funds. Long-term gains of more than Rs 1 lakh would be taxed at a rate of 10% plus cess and levies. There is no benefit of indexation provided.
2 Debt Mutual Funds
The tax on debt mutual funds is also depends on the holding period. Gains of less than three years are considered short-term, while gains of more than three years are considered long-term. In instances cases, the tax rates are:
Long-term Capital Gain: 20% with indexation
Short-term Capital Gain: Tax at slab rate plus cess and surcharge.
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3 Hybrid Mutual Funds
Hybrid Mutual Funds are a type of mutual fund that combines the advantages of equity and debt.
If a hybrid mutual fund invests more than 65 percent of its assets in stocks, the gains are taxed similarly to equity mutual funds. However, If less than 65 percent of AUM is invested in equities, the profits are taxed in the same way as debt mutual funds.
4 Gold Mutual Funds
Gold mutual funds are taxed at the same rate as debt mutual funds. Long-term profits from gold mutual funds will be taxed at a rate of 20% with indexation, while short-term gains would be taxed at a slab rate.
Read Also: CBDT clarification on requirement of scrip wise reporting of listed shares.
Dividend income from mutual funds
Mutual fund dividend income is taxed at the slab rate. Read More at Income Tax, TDS and Advance Tax on Dividend Income
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