When we invest in mutual funds, the profits we make are subject to taxes. The good news though is that, in many cases, this taxation is somewhat better (lower) than the regular income tax that we pay. The basic reason for this is that the government considers these profits as a different form of inflows/income compared to regular salary or interest incomes.
Understanding the impact of taxation is important – obviously, since our real returns from a mutual fund investment is what we get after tax. But, more importantly, understanding taxation will help us design our portfolio in a manner that could potentially reduce our tax burden and increase our ‘post-tax’ returns.
In this article, we will take a look at how such profits are considered, how taxation differs across mutual fund categories, what the actual tax rates are, and such other topics. This article, as in other articles in this series, has been written assuming very little prerequisite knowledge from the reader.