Mutual funds investor? Pay income tax on returns; check rates you must pay

Mutual fund returns on investment are taxable and hence it is advisable for investors to know their income tax liability on capital gains incurred on mutual fund investments. Ironically, an investor's capital gains in mutual fund returns have different rules for different types of mutual fund investment and the withdrawal time period. For example on debt funds, short term capital gain is levied if the mutual fund return on investment is for less than three years, while after three years, Long Term Capital Gains is levied. But, in equity mutual funds, short term capital gains of 15 per cent is levied on mutual fund returns on investment for a period of less than one year. If the period is beyond one year than Long Term Capital Gain is levied.

Here is how your capital gain is taxed on mutual fund return

Debt Mutual Funds: In these funds, equity exposure of investors is less than 65 per cent. In debt mutual funds, if an investor withdraws money before three years of investment, capital gains would be added to income tax in that financial year. While in case of withdrawal after three years in debt mutual funds, one will have to pay 20 per cent LTCG Tax after indexation. This rule is applicable on all types of debt mutual funds like income funds, dynamic bond funds, liquid funds, gilt funds, credit opportunity funds, international debt funds, etc.

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Equity Mutual Funds: In these kinds of funds, exposure in equity is above 65 per cent. In the equity mutual funds, if an investor withdraws before one year of investment, then a 15 per cent Short Term Capital Gain is imposed in mutual fund returns on investment. If the equity mutual fund is closed after one year of investment, then Long Term Capital Gain Tax gets levied on the mutual funds investor. In the equity mutual funds, LTCG Tax in mutual funds return on investment is 10 per cent on capital gains beyond Rs 1 lakh. Means, if an equity mutual fund investor makes a capital gain of Rs 1.5 lakh one's investment and the period of investment is more than one year, then pone will have to pay LTCG of Rs 5,000. In ELSS Mutual Funds, there is a lock-in period of three years and hence there is no chance of Short Term Capital Gain but will have to pay the LTCG Tax as per the rule mentioned above.

In Dividend Funds, one's maturity amount is tax-free but not the dividend. The mutual fund house credits the maturity amount after deducting the dividend distribution tax (DDT) that it pays to the government at the source.