Just like every other income, your mutual fund income is also Taxed – except it’s not just like your other income. Mutual fund profits are Taxed differently. While we know taxes that apply to your salary, things we buy, and so much more, how many of us actually know taxes on our investments. Especially if you are new to the stock market, this is quite important for you to understand. Now, though investments and the returns you receive from them might seem small, they are now. Eventually, they will turn out to be bigger, with bigger tax applications. So, here let’s find out more about it.
This is quite a question that everyone has on their mind. The answer to it is right here – yes, your earnings on mutual funds are taxed. You must be aware that you earn money in two ways for mutual funds.
If you are not sure, don’t worry, we have got you covered.
Mutual funds earn you profit either through capital gains or through dividends. I bet you have heard of them – still, let’s talk about it one step at a time.
When a capital asset is sold – the term capital gain refers to the rise in its value.
Simply put, a capital gain occurs when you sell an asset for a higher price than you paid for it.
A capital asset is almost any asset you hold, whether it’s a sort of investment (such as a stock, bond, or real estate) or something you bought for personal use (like furniture or a boat).
When you sell an asset, you realize capital gains by reducing the initial purchase price from the sale price.
Individuals are taxed on capital gains in certain instances by the Internal Revenue Service (IRS).
Hope you have got an idea about your capital gains. Now, let’s get going to the next part of income – dividends.
A dividend is a distribution of a portion of a company’s earnings to a class of shareholders chosen by the board of directors of the firm.
As long as they own the shares before the ex-dividend date, common shareholders of dividend-paying firms are usually eligible. Dividends can be received in the form of cash or extra equity.
Here, let’s speak about taxes on capital gains. Just like Rebate under section 87a for income, Section 80C, and more, there are implications for mutual funds and their capital gains – let’s get to know it.
You need to know that capital gains are of two types. They are Long Term Capital Gains and short-term capital gains, and they are taxed in those two ways.
According to the Union Budget 2018, the LTCG on sales of listed stocks over Rs. 1 lakh is taxed at 10%, while the STCG is charged at 15%.
Furthermore, in the case of debt mutual funds, both long and short-term capital gains are taxable.
There are only a few assets that qualify for capital gains, and they are:
There are a few ways that you can reduce your taxes on capital gains – here we go:
1. Take advantage of retirement plans, and you will have added benefits.
2. If you face a loss in the investment, you can reduce your capital gains tax.
3. Be sure about the invested tenure – if you wait days or months it would cost you more in taxes.
4. If you hold stocks for a longer period, you will be paying the lowest rate of tax.
You would find different kinds of exemptions on taxes that you pay on housing, income, and so much more. Similarly, you would find exemptions in taxes that you pay on your long-term gains. Now that you know long-term gains do not just pertain to mutual funds but several other assets and income. You can find exemptions on these and enjoy these benefits.
When you are a newbie, it must never seem like you are actually new. You must know your details and how things work in the market. This is not just good for now but can help you futuristically. Moreover, you can use it as a competitive advantage, and the same is applicable to your taxes.