Different modes of MF holdings and how are they taxed?

Profits gained from investment in mutual funds are known as 'Capital gains'. These capital gains are subject to tax

Mutual funds have become a popular choice for people looking for good returns for their money. However, understanding which mutual fund is better and what are the tax implications is crucial for maximising returns and minimising tax liabilities. 

 

Understanding the options

Single holding: As the name suggests, this is when an individual is the sole owner of the mutual fund units. It is the simplest form of ownership and is ideal for those who want complete control over their investments.

 

Joint holding: This allows two or more individuals to own the mutual fund units together. Joint holdings are further categorised into two types: 

Joint-either or survivor (E/S): In this mode, any of the joint holders can operate the account independently. If one holder passes away, the surviving holder(s) become the sole owner(s) of the units. 

 

All or survivor: Here, all joint holders must sign for any transaction. In case of the demise of one holder, the surviving holder(s) becomes the owner(s).

“Selecting the appropriate mode of holding should ideally align with the status of the bank account from which investments will be made. This approach can help minimise potential tax or legal complications in the future. Furthermore, designating a nominee is crucial as it facilitates smooth transmission and payouts in the unfortunate event of the unit holder’s demise,” Shrinivas Khanolkar, Head – Products at Mirae Asset Investment Managers (India).

In taxation matters, only the first holder is liable to pay taxes if they are the sole source of the investment. However, in the case of joint holdings, the names and PAN details of the second and third holders also appear in the Income Tax Annual Information Statement.

How is tax determined on mutual funds?

 

The taxation of mutual funds is determined by several key factors. These factors significantly influence the amount of tax levied on mutual fund investments:

 

Type of mutual fund: Taxation rules vary depending on the type of mutual fund, such as Equity Mutual Funds, Debt Mutual Funds, and Hybrid Mutual Funds.
 

Dividends: Dividends are portions of profits distributed by mutual fund houses to their investors.

Capital gains: Capital gains refer to the profit earned when an investor sells their mutual fund units at a price higher than the initial investment amount.

Holding period: The holding period is the time between purchasing and selling mutual fund units. According to Indian income tax regulations, a longer holding period generally results in a lower tax rate on capital gains. In other words, the longer you hold your investment, the less tax you are likely to pay.