What is the taxation criteria on index funds?

Saving is an integral part of Indians. Especially when it comes to saving for the future, from the perspective of children and old age, the need for funds becomes quite prominent. There are different investment options available and one must maintain a diverse portfolio to avert risk and uncertainty. These days investment in mutual funds is a common preposition as it has become easy to invest. Also known as index funds, they make for a reliable and growth-oriented option for investment and staying put for the long term. Investment in the market is a good way to earn. However, one must evaluate the risk factors before directing one’s hard-earned money to it. Mutual funds provide a variety of options, including tax evasion and saving, based on the choices the investors make.

As per the Indian taxation laws, the gains on a mutual fund are taxable as capital gains. However, the government is trying to encourage investment, by allowing different brackets, based on holdings of the fund, for taxation purposes. Let us explore the tax implications of index funds in our country:

• Period of holding<1 year: When the period of holding the mutual funds is less than a year which means that the mutual funds are bought not more than a year before, then the taxation laws term it as short-term capital gain (STCG). This is taxable and attracts a tax rate of 15 per cent under section 111A of the Income-tax Act 1961.
• Period of holding > 1 year: When the period of holding the mutual funds is less than a year which means that the mutual funds are bought not more than a year before, then the taxation laws term it as long-term capital gain (LTCG). However, this long-term capital gain must be limited to rupees one lakh to attract exemption. In case, this capital gain exceeds rupees one lakh, it is taxable. It attracts a tax rate of 10 per cent under section 112A of the Income-tax Act 1961.

Depending upon individual preferences, one may decide upon the kind of mutual fund one wishes to invest in. These days mutual funds are considered a lucrative opportunity to earn. They are less volatile and have multiple benefits in terms of low cost giving high returns. Since the investment by these funds is in multiple stocks in different fields such as the IT sector, insurance, construction, telecom, defense and financial sector etc., which ensures a division of risk in a range of sectors. UTI Nifty Index fund is one such option where the investment is relatively secure and gives a high return depending upon your holding. Investment is an important decision as one must take care of the richly deserved funds to take wise decisions while putting one’s money into the market. Since mutual funds offer predictable returns and are easily accessible, one must choose wisely. Though no research is required to invest in mutual funds, due diligence must be applied before making the investment decision since it relates to not one but many lives in a family.