How are Monthly Income Plans (MIPs) from mutual funds taxed?
MIPs try to provide regular income
Typically, 75-80% of the money in a monthly income plan (MIP) is invested in debt investments or debt securities
For tax purposes, MIP is treated like a debt fund
About 20% is invested in equities which provides the growth
If you remain invested for less than 3 years, the capital gains gets added to your income and you get taxed according to your tax slab
If you remain invested for more than 3 years, you get the benefit of inflation indexation
This means that cost of buying the units gets enhanced for tax calculation purposes
As a result, you pay lesser amount of tax and the rate of tax is also lower at 20% for long term capital gains tax
More than three years, your gain is considered as long term capital gains and short term capital gains for less than 3 years
In MIPs, you look forward to regular dividends for the regular income
The fund house has to pay the Dividend Distribution Tax or DDT, on the dividend
The dividend is tax free in your hands