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Experts discuss taxation on mutual funds and difference between savings, investments

personal finance | Sept 29, 2022 4:50 PM IST

Experts discuss taxation on mutual funds and difference between savings, investments


How are mutual funds taxed and what is the difference between savings and investments? Your answers are here

In this episode of ‘Mutual Fund Corner’, Rajee Rajesh, Founder and Director of Banconus Finserv discussed capital gains on mutual funds, while Hemant Rustagi, CEO of Wiseinvest talked about difference between saving and investing.

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On the difference between income earned from mutual funds and capital gains, Rajesh said, “When we invest in mutual funds, normally the returns can be generated or realized in two forms - there could be dividend payments from the mutual fund companies or the returns are also in the form of capital appreciation that is the NAV of the mutual fund units appreciates.”
She added, “On dividends, the taxation is pretty simple. Whenever a dividend is paid out, it is taxed in the hands of the investor as per the tax slab that the individual falls. But capital acquisition is taxed only on realization that is you have to pay tax only in the year in which you redeem the mutual funds.”
For debt funds, taxation is different.
Any income derived from debt funds up to three years is categorised as direct income, i.e., the same situation as lending money to a friend. However, if the investment is for over three years then the gains are taxed at 20 percent after indexation (the rate of inflation). This tax on average comes down to 5-10 percent.
On how to offset capital gains - both long-term capital gains (LTCG) and short-term capital gains (STCG) Rajesh said, “If an investor makes a loss on sale of his units, equity oriented mutual funds, he is allowed to adjust this loss. So this loss and profit can be set off and you are required to pay tax only on the net capital gains. But here are some rules applicable, it says that long-term capital loss can be set off only against long-term capital gains, whereas short term capital loss can be set off against both short-term and long-term capital gains.”
While explaining the difference between saving and investing Rustagi said, the objective of saving investment is to secure your financial future by following a disciplined approach.
"There are a number of reasons why investing is completely different from saving. Of course, one has to save first to be able to invest, but it's investing that helps you retain the value of your money over a longer period of time," Rustagi said.
Saving is putting money in a bank account. So obviously, the returns are low and the liquidity is very high. When we talk about investing, it is basically when you buy assets like equity, debt, or real estate or commodities, with the expectation that they will earn a healthy returns for you over a period of time.
Watch video for more.
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