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20 Jul 2018
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TAX IMPLICATIONS

CAPITAL GAINS TAX ON MUTUAL FUNDS

When an individual sells a Capital Asset and makes profit on it, it is known as capital gains and tax on such Capital gains is to be paid. Capital Asset, as defined in the Income Tax Act, includes property of any kind except:
1) Stock In Trade
2) Personal Effect Assets ( i.e. held for personal use of the tax payer)
3) Agricultural Land in India (as prescribed limits)
4) 6.5% Gold Bonds-1977, 7% Gold Bonds-1980, National Defence Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government.
5) Gold Deposit Bonds under Gold Deposit Scheme, 1999 notified by the Central Govt.
In the following cases Income from Capital Gains is specifically exempt, they are:
1) UTI 64: Income from transfer of a unit of the Unit Scheme, 1964 referred to in Schedule I to the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 and where the transfer of such asset takes place on or after 1.4.2002.
2) Eligible Equity Shares: Income from transfer of an “eligible equity share” in a company purchased on or after 1.3.2003 and before 1.3.2004 and held for a period of twelve months or more.
3) Capital Gains of a political party: subject to provisions of Section 13A of the I.T Act, 1961.
4) Transfer of agricultural land: In the case of an individual or HUF, capital gains arising from the transfer of agricultural land, where such land is situated in any area falling within the prescribed jurisdiction of a municipality or a cantonment board.
5) Long term capital gain of Equity Shares/Funds: Capital gains arising from the transfer of a long term capital asset, being an equity share in a company or unit in an equity oriented fund where such a transaction is chargeable to securities transaction tax and takes place on or after 1st October, 2004.
All the other transfers are thus subject to capital gain tax as per the provisions. Therefore transfer of mutual funds is liable to Capital Gains tax, as not covered by exceptions or exclusions.

Any investment decision is not guided only by the benefits which a particular financial product offers, but all=so by the current tax provisions that the instrument is subjected to. Various types of mutual funds schemes are subject to different tax provisions. Therefore, it is imperative to have a proper understanding of various factors and their relevant tax provisions so as to help an individual plan ones investments in a better manner. One can invest in any Mutual Fund Scheme depending upon ones risk profile and financial profile.

FACTORS DETERMINING THE TAXATION OF MF

1. Residential Status: The capital gains tax rates are determined based on the residential status of an individual / investor. Residential status can be either ‘Resident Indian’ or ‘Non-Resident India” (NRI). The residential status of an individual is to be determined on the basis of period of stay of the tax payer in India and is computed separately for each year. If an individual satisfies any of the following condition he is said to be Resident for that financial year. They are:
He is in India for a period of 182days or more in that particular financial year.
OR
He is in India for a period of 60days or more in that financial year and has been in India for 365 days or more in the 4 previous years immediately preceding the relevant financial year.
If an individual satisfies none of the above conditions, he is said to be Non Resident in India (NRI).
2. Types of Funds:
a) Equity-oriented Mutual Funds – MF schemes that invest at least 65% of its fund corpus into domestic equity and equity related instruments are known as equity mutual funds.
  • Gold exchange traded funds, or Gold ETFs, are not treated as equity funds or taxation.
  • Even international funds are not considered as equity funds in the case of taxation even though they invest in equity.
  • The criteria to qualify for an equity fund is not just investments in stocks but stocks listed in India.
  • In the case of hybrid or balanced funds, if at least 65% of the assets are invested in domestic equity, they qualify as equity-oriented funds.
b) Non-Equity Mutual Funds – MF schemes that invest less than 65% of their portfolio in equities and equity related instruments are known as Non-Equity Funds / Debt funds. The non-equity funds qualify as debt funds for the purpose of taxation. These would include all types of debt funds, international funds, Gold ETFs etc.
3. Period of Holding: Capital gains on Mutual funds could be either long term capital gains or short term capital gains, depending on your investment horizon.
LONG TERM SHORT TERM
EQUITY ORIENTED More than 1 year 1year or less
NON EQUITY ORIENTED More than 3 year 3year or less

TAXATION OF MUTUAL FUNDS

TAX TO THE UNIT HOLDERS

CAPITAL GAINS TAXATION
Indiviual/HUF Domestic Company NRI
Equity Oriented Schemes
LTCG {HP>12m} NIL
STCG {HP=<12m} 15%
OTHER THAN Equity Oriented Schemes
LTCG {HP>36m}
20%
(after indexation)
20%
(after indexation)
Listed - 20%(after indexation)
Unlisted -10%
(without indexation)
STCG {HP=< 36m}
Slab Rates 30% Slab Rates
TDS (APPLICABLE ONLY TO NRI INVESTORS)
Equited Oriented Schemes Other than Equity Oriented Schemes
Long Term Capital Gains NIL OTHER THAN Equity Oriented Schemes Listed -20 % (after indexation) Unlisted - 10% ( without indexation)
Short Term Capital Gains 15% 30%
LTCG – Long Term Capital Gains
STCG – Short Term Capital Gains
HP- Holding Period<
Surcharge – Surcharge to be levied in case of Individual/HUF unit holder where their income exceeds Rs. 1 crore.
Surcharge to be levied for domestic corporate unit holders where income exceeds Rs. 1 crore but less than 10 crores and at 12% where income exceeds 10 crores.
Short term/Long term capital gain tax will be deducted at the time of redemption of units in case of NRI investors only.
Education cess – 3% will be applied on Tax plus surcharge.
TAX IMPLICATION ON DIVIDEND RECEIVED BY UNIT HOLDERS
Individual/HUF Domestic Company NRI
DIVIDEND
Equity Oriented Schemes NIL
Debt Oriented Schemes NIL

FEMA REGULATIONS APPLICABLE TO NRIs

  • 1) A NRI is allowed to purchase unites of domestic mutual funds on repatriation without any limit.
  • 2) A NRI is allowed to purchase units of domestic mutual funds and money market mutual funds in India on non-repatriation without any limits.
  • 3) A NRI willing to enjoy repatriation benefits should make the purchase consideration via NRE or FCNR(B) only.

TAXATION FOR ASSET MANAGEMENT COMPANY

(TAX TO BE PAID BY THE AMC): Dividend Distribution Tax is to be paid by the Mutual Fund Company on distributed income according to the following rates.
TAX ON DISTRIBUTED INCOME (PAID BY THE SCHEMES)
Equity Oriented Schemes NIL
Money Market and liquid Schemes
Debts Schemes
Infrastructure Debt Schemes
25%+12% Surcharge+ 3% cess = 28.84% 30%+ 12% Surcharge+ 3% cess = 34.608% 25%+ 12% Surcharge+ 3% cess = 28.84%
5%+ 12% Surcharge+ 3% cess = 5.768%
STT: Securities Transaction tax will be deducted at the time of redemption/switch to the other schemes/sale of units.
For the purpose of determining the tax payable, the amount of distributed income to be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributed by the Mutual Fund.

CAPITAL GAINS IN SHORT

Transaction Short Term Capital Gain Short Term Capital Gain
Sale Transaction of equity shares/units of equity oriented fund which attract STT 25% NIL
Sale Transaction other than mentioned (i.e.without payment of STT)
Indiviuals (Residents/NRIs)
Partnership (Residents/NRIs)
Progressive Slab Rates 30% 20% /10%
10%
10%
Resident Company Oversease company Financal organisations(specified in sec 115AB) FII 30% 40% (corporate) 30% (non-corporate)
Other Foregin Companies 40% 20% / 10%
Local Authority 30% 20% / 10%
Co-op society Rates Progressive Slabs Rates
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