Taxation in Mutual Fund Schemes

Taxation in Mutual Fund Schemes Taxation – Mutual Fund Section 10(23D) of the Indian Income tax Act, 1961 provides that the entire income of Mutual Funds, as registered with the Securities & Exchange Board of India (SEBI) will be exempt from income tax. Section 196(4) of the Indian Income tax Act, 1961 provides : the Mutual Fund, will receive all income without any deduction of tax at source. No additional income tax is payable u/s 115R of the Income tax act, 1961 on any income distribution made by a mutual fund in case of open ended equity oriented funds : those funds where the investible funds are invested by way of equity shares in domestic companies to the extent greater than 50% of the total corpus of the fund Tax benefits / consequencs to investor Income tax : All unit holders Section 10 (35) of the Indian Income tax act, 1961 states that, income received, in respect of units of a mutual fund would be exempt in the hands of the unit holders. The above however is subject to capital gains tax, discussed later. Tax Deduction at Source (TDS) : All unit holders Section 194K and 196A of the Indian Income tax act, 1961 state that, no income tax is deductible at source on any income distribution by the mutual fund. Securities transaction tax Purchase of an equity share (or unit) in a company (or equity oriented fund) where : Transaction is executed in a stock exchange, and Settlement is by actual delivery of share (unit) Rate of tax : 0.1% Payable by: Purchaser Securities transaction tax …. Contd. Sale of an equity share (or unit) in a company (or equity oriented fund) where : Transaction is executed in a stock exchange, and Settlement is by actual delivery of share (unit) Rate of tax : 0.1% Payable by: Seller Securities transaction tax …. Contd. Sale of an equity share (or unit) in a company (or equity oriented fund) where : Transaction is executed in a stock exchange, and Settlement is otherwise than by actual delivery of share (unit) Rate of tax : 0.02% Payable by: Seller Securities transaction tax …. Contd. Sale of a derivative: Transaction is executed in a stock exchange, and Rate of tax : 0.0133% Payable by: Seller Securities transaction tax …. Contd. Sale of a unit of an equity oriented fund to the Mutual fund: Rate of tax : 0.25% Payable by: Seller Capital Gains – Long Term Applicable on sale of units held for more than 12 months by resident Individuals and “HUF”s / Partnership Firms / Domestic Companies / NRIs Equity Schemes : NIL Debt Schemes: 10% without indexation benefit + (10% Surcharge + 2% Edu. Cess) i.e : 10% + 10% = 11% + 2% = 11.22% 20% (with the benefit of Indexation) Surcharge Individuals & HUF - 10% on tax payable (if income exceeds Rs. 10 Lacs) Corporates - 10% on Tax Payable Capital Gains – Short Term Applicable on sale of units held for less than 12 months by resident Individuals and “HUF”s / Partnership Firms / Domestic Companies / NRIs Resident Individuals and “HUF”s Equity Scheme : 10% Debt Scheme : maximum marginal rate of tax. Partnership Firms Equity Scheme : 10% Debt Scheme : maximum marginal rate of tax. Domestic Companies Equity Scheme : 10% Debt Scheme : 30% + 10% surcharge + 2% cess (33.66%) Capital Gains – Indexation Inflation : It means more money chasing few goods and services Example : with Rs. 100 you can buy 5 kgs of apple when the inflation is say, zero when the inflation rate is 5%, then one needs Rs.105 to buy the same no. of apples. This is because there is more money chasing the same quantity of produce Indexation is used to calculate tax when inflation is taken into account. Indexation Table Cost Inflation Index as Notified by Govt. Of India Financial Year 1981-82 1982-83 1985-86 1990-91 Cost Inflation Index 100 109 133 182 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 281 406 426 447 463 480 497 Capital Gains – Indexation …contd. Indexation is used to calculate tax when inflation is taken into account . Example : Puchase of mutual fund unit for Rs.15 on 31st March 1999 (investor plans to utilize the benefits of fiscal 1998-99 & 1999-2000) Cost inflation index 98-99 is 351 & 99-2000 is 389 Sell unit on April 1 2000 (beginning of next fiscal Year) Assuming sale Price is 15 Indexed cost = 389/351*15 = 16.62 Means….. Investor has booked a Capital Loss of Re 1.62 Hence income not liable to Tax Dividend Distribution Tax Resident Individuals and “HUF”s Equity Scheme NIL Debt Scheme 14.025% (12.50% + 10% Surcharge + 2% Cess) Partnership Firms Equity Scheme Debt Scheme Domestic Companies Equity Schemes Debt Schemes NIL 22.44% (20% + 10% Surcharge + 2% Cess) NIL 22.44% (20% + 10% Surcharge + 2% Cess) Taxation for NRI Investors The Non Resident Indians (NRI) can invest in the following schemes Bank Deposits – Interest taxable and TDS applicable in NRO account Corporate Bonds – Interest taxable and TDS applicable Government Securities – Interest Taxable and TDS applicable Mutual Fund schemes – Tax free Dividend and TDS applicable for capital gains in Debt funds & in Short term capital gain in Equity Funds NRI Taxation Chart Short Term Capital Gains Long Term Capital Gains Dividends TDS 10% + 10% SC+ 2% Cess EQUITY FUNDS Effective - 11.22% NIL Tax Free Dividends are tax free. Subject to ddt @ 12.5% + 10% SC + 2% Cess. Effective 14.025% For STCG DEBT FUNDS 30% + 10% SC+ Effective - 33.66% 2% Cess 10% + 10% SC+2% Cess Effective - 11.22% without indexation and 20%+10%SC+2%cess. Effective Yield - 22.44% with Indexation STCG and LTCG Tax Deduction and Tax Rebate Deduction under section 80C and subject to the provisions, an Individual / HUF is entitled to a deduction from the gross total income upto Rs.1.00 Lac Rebate under section 88E provides that where total income of a person includes income chargeable under the head “ Profit and Gains of business or profession” arising from sale of equity oriented fund Will get rebate equal to the STT paid by him in the course of his business. Rebate allowed from income tax by applying average rate of income tax Securities Transaction Tax, as per chapter VII of the Finance (No.2) Act, 2004 pertaining to the seller at 0.25% on the sale of a unit of equity oriented fund to the mutual fund. Exempt from wealth tax & gift tax Thank You