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No Taxes on Unrealized Gains

A mutual fund investor is not liable to pay taxes on unrealized gains. Taxes are meant to be paid only when the investments are redeemed

I started investing in various equity as well as debt funds in the second half of last year and this is the first time that I shall be filing my Income Tax return after these investments. I wanted to know if I need to pay tax / show gains from these mutual fund schemes considering the facts that:

  1. I have not redeemed a single unit since investment from any of the mutual fund schemes.
  2. I have invested in growth schemes only - in both equity and debt (including short term debt funds). Thus there has been no dividend payout or any income accrued from these investments. As I have not redeemed any units or earned any capital gains so far, am I liable to pay tax on these investments in this financial year?
Hoping for quick resolution of my query.
- Tapas Shyam

You are not liable to pay any tax this year. Income from mutual funds can be categorized into two parts - dividend income and capital gains. As you have opted for growth option under all the funds, we will discuss only income in form of capital gains here. Capital gain/loss arise only when you sell mutual funds. You need not pay any taxes on unrealized gains. You will be liable to pay tax on capital gains in the year when you redeem your investments. The tax will vary for equity and non-equity funds.

In equity funds, if you redeem your investments within one year from the date of purchase, it will be termed as short term capital gains (STCG) and if you sell after one year, it will be long term capital gain (LTCG). For debt funds, after changes in the recent budget, STCG is levied if hold for less than 3 years and LTCG for over 3 years. STCG from equity funds is taxed at a flat rate of 15 per cent. STCG from debt funds will be added to your income and taxed as per applicable income tax slab rate. Long Term Capital Gain from equity schemes is tax free whereas, LTCG from debt funds will be taxed at 20 per cent with indexation.



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