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How will my gains from ultra short duration fund be taxed?

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ET Online|
Dec 11, 2019, 02.11 PM IST
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I have a corpus of Rs 10 lakh in an ultra short duration fund. My gains are around Rs 2.5 lakh. It has taken three years to develop this amount. My doubt is if I redeem this corpus of Rs 2 lakh every month, do I need to pay tax if my gains are less than Rs 1 lakh?
-- Yuvaraj Vaaji

It seems, you are a bit confused about the taxation of mutual funds. Rs 1 lakh limit per financial year is applicable to equity mutual funds.

You have invested in a debt mutual fund scheme. Debt mutual funds are taxed differently. If you sell your debt mutual funds before three years, your short-term capital gains are added to your income and taxed according to the income tax slab applicable to you. That means, if you are in the 20% tax bracket, your short term gains would be taxed at 20%.

If you sell your debt mutual funds after three years, the gains are treated as long term capital gains, they would be taxed at 20 per cent with indexation benefit. Indexation benefit helps you to inflate your purchase cost and it helps you to bring down your actual tax rate, especially in an inflationary scenario.

In short, your capital gains of Rs 2.5 lakh would be treated as long term capital gains since you have held your investments for more than 36 months or three years. It will be taxed at 20% with indexation benefit.

Also Read

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Should you invest in ultra short duration funds for extra returns?

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