Are the dividends and redemptions of mutual funds added to the taxable income or is it tax free? I also want to know if it is better to invest in the New Pension System (NPS) or a mutual fund pension scheme.
-Amit
If you’re an equity fund investor, then the realised gains on investments held for less than one year are considered as short-term capital gains and taxed at 10 per cent. If you hold the investments for more than one year, then the gains are considered to be long-term capital gains and are tax free in your hands. This applies to funds where at least 65 per cent of the assets are invested in equities.
For fixed income funds, short-term capital gains are added to your taxable income while long-term capital gains are subject to 10 per cent tax without indexation or 20 per cent with indexation.
Coming to your second question, we believe that the NPS is an efficient choice. It has been crafted carefully, and since it is new, a lot of its variables are still being formalized. Furthermore, today, no insurance company is offering a new pension plan. All such pension plans have been put on hold because of IRDA’s request to offer guaranteed returns on pension plans, which hasn’t been accepted by insurance companies. Hence, given the limited options available today, the NPS is the best suited.
This article was originally published on February 16, 2012.
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