💎 How do taxes impact your mutual fund and PMS investments?

In this newsletter let’s explore how investments in mutual funds and PMS are taxed –

1. Mutual Funds

Mutual funds are investment vehicles that pool money from many investors to invest in a diversified portfolio of direct stocks, fixed income instruments, commodities and other securities. Based on the underlying mandate of the fund, a portfolio of these securities is created and managed by a professional fund manager. Mutual funds have emerged as one of the best instruments to create long term wealth.

From a tax perspective, mutual funds can be broadly categorised into 3 segments:

Segment 1: Taxation of mutual funds with over 65% exposure in listed domestic equity instruments):

• Short-term capital gains (STCG): If held for less than 1 year. Tax Rate: 15%.
• Long-term capital gains (LTCG): If held for more than 1 year. Tax Rate: 10%.

Segment 2: Taxation of mutual funds with 35-65% exposure in listed domestic equity instruments:

• Short-term capital gains (STCG): If held for less than 3 years. Tax Rate: Added to income and taxed as per individual's slab rate.
• Long-term capital gains (LTCG): If held for more than 3 years. Tax Rate: 20% with indexation.

Segment 3: Taxation of mutual funds with less than 35% exposure in listed domestic equity instruments:

• Marginal tax rates apply

Here's a summary of how investments in mutual funds are taxed:

A few things you need to keep in mind:

1. Long-term capital gains on equities and units of mutual funds up to Rs 1 lakh are not taxable.
2. If you have invested through IDCW (Income Distribution and Capital Withdrawal) plan then income distributed by the mutual fund shall be clubbed with your income and taxed at slab rates.
3. Each SIP (Systematic Investment Plan) instalment is considered as a separate investment, and the capital gains are calculated accordingly.
4. Systematic Withdrawal (SWP) and Systematic Transfer (STP) of mutual fund units attract capital gain tax in case of profits and are taxed as per the rates explained above.
5. When you switch schemes (Direct to Regular or vice versa) the profits attract capital gain tax.
6. Additional surcharge and cess shall be applicable based on your overall income.

2. Portfolio Management Services (PMS)

Portfolio Management Services (PMS) is an investment avenue that allows a professional fund manager to manage your portfolio. There are PMS of direct stocks, mutual funds, debt securities, and other securities.

Under a PMS, investments are held directly in the investor's name, and the tax treatment would depend on the nature of the underlying securities.

Equity stock PMS are the most popular amongst investors. Taxation of direct equity stocks, apply to these PMS.

• Short-term (less than 12 months): 15%.
• Long-term (more than 12 months): 10% on gains over INR 1 lakh.
• Any dividend and/or interest income received is added to the overall income and taxed as per the slab rate.

Here's a concise breakdown:

The impact of taxation is important as it impacts your returns and overall portfolio performance.