Mutual funds have become a popular choice for those looking to earn good returns on their money. However, understanding which mutual fund is best and what the tax implications are is critical to maximizing returns and minimizing tax liabilities.
Understanding the options
Sole ownership: As the name suggests, this is a form of mutual fund ownership where one person is the sole owner of the mutual fund units. It is the simplest form of ownership and is ideal for those who want to have complete control over their investments.
Joint tenancy: This allows two or more people to own mutual fund units jointly. Joint holdings are further classified into two types:
Ensemble or Survivor (I/O): In this mode, any of the co-owners can operate the account independently. If one of the owners dies, the surviving owner(s) becomes the sole owner(s) of the units.
All or survivors: In this document, all co-owners must sign any transaction. In the event of the death of one of the owners, the surviving owner(s) becomes the owner(s).
“Selection of the appropriate holding mode should be in line with the status of the bank account from which the investments are to be made. This approach can help minimise potential tax or legal complications in the future. Also, appointment of a nominator is crucial as it facilitates hassle-free transfer and payments in the unfortunate event of the death of the unit holder,” Shrinivas Khanolkar, Head of Products, Mirae Asset Investment Managers (India).
In tax matters, only the first owner is required to pay taxes if it is the sole source of the investment. However, in the case of joint ownership, the names and PAN data of the second and third owner also appear in the Annual Income Tax Information Declaration.
How is mutual fund tax determined?
The taxation of mutual funds is determined by several key factors. These factors significantly influence the amount of tax that applies to mutual fund investments:
Mutual Fund Type: Tax 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 that mutual fund houses distribute to their investors.
Capital gains: Capital gains refer to the profit made when an investor sells his or her mutual fund units at a price higher than the initial investment amount.
Holding period: The holding period is the time between the purchase and sale of mutual fund units. As per Indian income tax rules, 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 have to pay.
First published: September 2, 2024 | 18:13 IS
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