Why do mutual funds pay return of capital?

Why do mutual funds pay return of capital?

Tax-exempt mutual funds

Investment funds are exempt from taxation until they are redeemed. When you decide to withdraw the invested money, the capital gain or loss obtained must be included in the savings taxable base in the IRPF.

At the time of redemption of a fund and withdrawal of the money invested in it, you will have to pay tax on the income obtained. Capital gains are subject to a 19% withholding tax. Below we detail the IRPF tax rates depending on your place of residence.

In case your investment has obtained a negative profitability you have the possibility to compensate this fall of your patrimony with other profits that you have been able to obtain thanks to other investments.

In addition to the aforementioned tax advantages offered by the taxation of investment funds, there is another type of expense that you can deduct when filing your income tax return: the expenses associated with the purchase and sale of investment fund units. Thanks to this advantage, all the extra money that you have had to disburse when buying shares in a fund or the money that the entity has charged you after selling the shares can be deducted in your tax return.

Return on investment

Fixed income is a type of investment made up of all financial assets in which the issuer is obliged to make payments in a previously established amount and period of time.

In other words, in fixed income, the issuer guarantees the return of the invested capital and a certain profitability. In other words, if we acquire a fixed income instrument, we know the interest or profitability that we will be paid from the moment we purchase the instrument.

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It is called “fixed” precisely because we know from the beginning the amount we are going to be paid at any given moment. Generally, they pay a fixed coupon every six months. Therefore, the yield is fixed from the issue of the security until maturity.

Fixed income is the opposite type of investment to variable income. An example of variable income is equities. In variable income we do not know what interest or dividend we are going to be paid during the period in which we buy.

Since we know what the issuer is going to pay us at any given time, we can calculate the theoretical price of the securities, adding up the future cash flows we are going to receive, using the net present value (NPV) method. We can also use the internal rate of return (IRR) method to calculate the return we will receive if we buy the fixed income security in the market.

How to declare the sale of mutual funds

One of the great tax advantages of mutual funds is that the transfer between funds is exempt from taxation. That is, if you move your investment from one fund to another, you do not have to pay taxes on the gains obtained to date (latent capital gain).

1. Income from movable capital (e.g. interest from current accounts, deposits, dividends, etc): they are integrated with each other in the savings tax base and if the income obtained is negative, its amount will be offset against the positive balance of capital gains and losses declared in the other component of the savings tax base with the limit of 25 percent of said positive balance.

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2. Capital gains and losses that are included in the savings taxable base (for example, sale of investment funds, shares, real estate, etc.): if the balance of the integration and compensation thereof is negative, the amount thereof may be offset against the positive balance of the other component of the savings taxable base, income from movable capital, up to a limit of 25% of such positive balance.

Mutual funds pay taxes

Note the difference between:  Taxes that reach the holding of fund shares and taxes that are levied on the result of holding the shares, in this sense there are two different taxes that you must take into account:

Many people that perhaps are not very related to the tax, economic, tributary or financial field may find it problematic to understand what are these taxes that we have mentioned in the subtitle. The reality is that they are all related to each other, and here we will definitely explain how they work.

The financial income tax is a new tax, which taxes the results of what is wrongly called “financial gambling”, during the previous government this tax was included in profits because obviously the positive results of having shares, or shares of investment funds, are profits. Although it is thought that they are two different taxes, in reality, for practical purposes, they are the same, thus the tax on profits includes the so-called tax on financial income.

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