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The financial instrument mutual fund units come under the ‘capital asset’ of the holder. According to the provisions of Section 2(14) of the income tax act, 1961, a capital asset includes ‘property of any kind’ held by an assessee, whether or not it is connected with his business or profession, encompassing both movable and immovable properties. All kinds of property, whether movable, immovable, tangible, or intangible, including rights of management or control of an Indian company, is a capital asset. Amit Maheshwari Tax Partner, AKM Global explained to ET Wealth that judicial interpretations have broadly recognised any transferable asset with value as ‘property’ under the Act, terming mutual fund as capital asset. When a person changes the holding of mutual fund units as a gift via a will or inheritance, it is not considered a transfer. If it is not perceived as a transfer despite being a capital asset, it will not attract any tax liability. However, there’s cap. Therefore, mutual fund units can be gifted during the lifetime of the holder, not only on death, explained Maheshwari. As per the provisions of Section 56(2 (x) of the Act, gifts up to Rs 50,000 in a financial year are allowed. If a person receives mutual fund units without paying anything for them and their fair market value (FMV) exceeds Rs 50,000, the entire FMV will be taxed as ‘Income from Other Sources’ in the recipient’s hands. However, if the units are received from a ‘relative’ as defined under the Income Tax Act, the amount will be exempt from tax. The same rule also applies to a Hindu Undivided Family (HUF) in similar cases. Taxation On Mutual Fund Gains For equity mutual funds, gains are classified as short-term capital gains (STCG) if held for 12 months or less. If held for more than 12 months, they are considered long-term capital gains (LTCG). STCG: 20% (for holdings of 1 year or less) LTCG: 12.5% (on gains exceeding Rs 1.25 lakh for holdings over 1 year) For debt mutual funds, taxation follows the investor’s applicable tax slab, regardless of the holding period. Gains from other mutual funds are considered short-term if held for less than 24 months and long-term if held for more than 24 months. Short-Term Capital Gains Tax On Mutual Fund Previously taxed at 15%. Now taxed at a flat 20% irrespective of the income tax slab. Long-Term Capital Gains Tax On Mutual Funds Previously taxed at 10% with indexation benefits for gains exceeding Rs 1 lakh. Now taxed at a flat 12.5% without indexation benefits, with an exemption limit of Rs 1.25 lakh.
