Big Questions
Do you have to pay tax when fund managers sell stocks in a fund?
Read on to find out if the investor is liable to pay tax for any changes in the mutual fund portfolio by the fund manager
09-Aug-2022
There are various reasons why a fund manager buys or sells stocks in the fund. For instance, mutual funds have to stick to their investing mandate such as asset allocation. So, a sectoral or thematic fund has to maintain at least 80 per cent allocation in a particular sector. Likewise, an aggressive hybrid fund needs to maintain a 65 to 80 per cent allocation in equity and the rest in debt. Thus, due to market fluctuations, if the fund breaches the defined exposures, the fund manager can indulge in some buying or selling to rebalance. Also, it may so happen that the fund manager loses conviction on a particular stock or wishes to reduce its exposure in case the stock has shot up dramatically which leads to some sell-off.
So is the investor liable to pay capital gains tax when the fund manager sells equity shares?
The fact is neither the fund manager nor the investor is liable to pay capital gains tax when equity shares are sold from the mutual fund portfolio. This is because mutual funds are treated as a pass-through entity for the purpose of taxation as the gains are passed on to the investors and don't accrue to the AMC. As an investor, you are liable to pay capital gains tax only when you redeem your investment from the fund.
In the case of an equity-oriented fund, if your holding period is more than a year, the gains are termed as long-term capital gains and you're liable to pay a 10 per cent tax on them. However, gains upto Rs 1 lakh in a financial year are tax exempt. If your holding period is less than a year, the gains are termed as short-term capital gains which are taxed at the rate of 15 per cent.
In the case of a non-equity-oriented fund, if your holding period is less than three years, the gains are termed as short-term capital gains and are taxed as per your tax-slab. If the holding period is longer than three years, the gains are counted as long-term capital gains and are taxable at 20 per cent after indexation.
Suggested read: Mutual fund redemption and taxation
