How do we Earn Income from Mutual Funds ?

 

Mutual funds offer investor returns (income) in two forms ; dividends and capital gains. 

When a company earns profit or has surplus cash, it may decide to pay this out to us investors as a dividend. We receive dividends in proportion to the number of mutual fund units we hold. 

A capital gain is the profit realised by investors if  the selling price of the units is greater than the purchase price. In simple terms , when we redeem (sell) some units of  a mutual fund, capital gains arise due to the appreciation in the price of the mutual fund units.

Both these forms of income, dividends and capital gains, are taxable. Dividends are taxed under the head, "Income from other sources", and capital gains , as the name suggests, are taxed under the head, "Capital Gains".