How do taxes affect lump sum investments?

Lump sum investments are subject to different tax implications and depend on four key factors - type of fund, nature of gains (capital gains or dividend), holding period, and amount of gains you make.

For equity mutual funds:

• If you hold your investment for more than 1 year (long term), gains above ₹1.25 lakh in a financial year are taxed at 10% without indexation.
• If you sell before 1 year (short term), gains are taxed at 15%.
• Dividends from equity funds are taxable based on your income tax slab, and if the dividend income exceeds ₹5,000 yearly, 10% TDS is deducted.

For debt mutual funds:

• Holding period for long term is over 24 months (2 years). Gains held beyond this are taxed at 20% after adjusting for inflation (indexation).
• Short term gains (sold before 24 months) are added to your income and taxed as per your slab.
• Dividends from debt funds are fully taxable as per your slab.

Because taxes reduce your effective returns, it’s important to factor them in when planning lump sum investments. Using tax-efficient investment options or holding assets for longer can help minimise tax impact. Investors should evaluate taxation when comparing various funds and consider holding investments for longer periods to improve post-tax returns.

You could use an online Lumpsum Calculator to understand how your investments are likely to grow.