CHAPTER 8: TAXATION
Income earned by Mutual Fund Schemes
As per the prevailing tax laws in India, a mutual fund’s income is exempt from income tax, since MF are constituted as trusts in India for the benefits of the unitholders. Section 10(23)(D) of the Income Tax Act exempts all the income earned by the mutual fund schemes from any tax
The applicable tax rates in case of capital gains and dividend would vary as under:
- Type of income: The capital gains are taxed differently in comparison to the dividend income. At the same time, within capital gains, short term capital gains attract different tax rates in comparison to long term capital gains.
- Type of mutual fund schemes: Income from equity-oriented mutual fund schemes (schemes where more than 65% of AUM in equity shares are listed on RSE) is taxed at different rates in comparison to non-equity-oriented schemes.
- Type of investor: The tax treatment may differ for Resident Indian Investors, NRIs, and non-individual investors. It must be noted that in case of joint holding, the income, be it capital gains or dividend, would be considered to have been earned by the first holder.
Capital Gain Tax
| Equity Oriented Funds | Non Equity Oriented Funds | |
|---|---|---|
| Short Term Capital Gain | 15 percent | Marginal Tax Rate, as Applicable for the Investor |
| Long Term Capital Gain | 10 Percent | 20% with Indexation Benefits |
SETTING OFF CAPITAL GAINS & LOSSES UNDER THE INCOME TAX ACT
- Capital loss, short term or long term, cannot be set off against any other head of income (e.g., salaries).
- Short term capital loss is to be set off against short term capital gain or long term capital gain.
- Long term capital loss can only be set off against long term capital gain.
Dividend Income
Union Budget presented by the finance minister in February 2020 has done away with dividend distribution tax has. As per the new regime, the dividend would henceforth be added to the taxable income of the assessee for the year. This means the dividends would be taxable in the hands of the recipient at the applicable tax rate.
Post-tax dividend received by the investor Dividend paid out by the scheme – Tax payable thereon, as per the applicable tax slab
- Tax on dividends can be reduced through various exemptions and adjustments, as applicable.
- Dividend income would be tax exempt for investors in various tax- exempt categories, for example charitable trusts, mutual fund schemes and individuals in the tax-exempt slab.
- For growth option, the mutual fund schemes are tax-exempt, and the capital gains are realized only when booked, one can allow the gains to run without worrying about tax on the same. This concept is known as deferment of taxes and allows one the benefit of compounding before tax.
STAMP DUTY ON MUTUAL FUNDS
Post amendments carried out in the Indian Stamp Act in February 2019, stamp-duty is required to be paid for issue and transfer of Mutual Fund units with effect from 1 July 2020.
- Stamp duty @0.005% of the investment amount shall be applicable at the time of issue of units for both physical and demat units.
- Units will be allotted for the amount available post deduction of stamp duty.
- Stamp duty will be applicable to all transactions pertaining to scheme inflows:
- Purchase
- Additional Purchase
- Dividend reinvestment
- Systematic Transfer Plan (STP)
- Systematic Investment Plan (SIP)
- Income distribution cum capital withdrawal (Dividend) Transfer Plan (DTP).
Securities Transaction Tax
STT is applicable only on redemption/switch to other schemes/sale of units of equity oriented mutual funds whether sold on stock exchange or otherwise.
STT is not applicable on purchase of units of an equity scheme. It is also not applicable to transactions in debt securities or debt mutual fund schemes.
STT applicability for Investors in Equity oriented Mutual funds
| Transactions | Rates (In Percentage) | Payable By |
|---|---|---|
| Purchase of units of equity oriented mutual fund | Nil | Purchaser |
| Sale of units of equity oriented mutual fund (delivery based) | 0.001 | Seller |
| Sale of equity shares, units of business trust, units of equity oriented mutual fund (non- delivery based) | 0.025 | Seller |
| Sale of units of an equity oriented mutual fund to the mutual fund | 0.001 | Seller |
TAX BENEFITS UNDER SECTION 80C OF INCOME TAX ACT
Certain mutual fund schemes, known as Equity Linked Savings Schemes (ELSS) are eligible for deduction under Section 80C of the Income Tax Act. The benefit is available up to Rs. 1.50 lacs per year per taxpayer in case of individuals and HUFs. The scheme has a lock- in period of 3 years from the date of investment.
- If the limit under this Section has been exhausted through some other avenue, any investment in ELSS would not get any additional tax exemption, but the investment would still be locked-in for atleast 3 years.
- Where investment is made through SIP, each investment would be locked-in from the date of the respective investment. The lock-in for the entire amount would not get over on completion of 3 years from the date of the first SIP installment.
- Tax benefit would be available to the first holder, in case of a joint holding.
Tax Deducted at Source
There is no TDS on re-purchase proceeds to resident investors. However, for certain cases of non-resident investments, the same is applicable.
The income tax regulations prescribe different rates, depending on the nature of the investor (Indian/ Foreign and Individual/Institutional), nature of investment (equity/debt) and nature of the income (dividend/capital gain).
In case of dividends from mutual fund schemes, even for resident Indians, TDS is applicable. The tax is required to be deducted at 10% on the dividend amount if it exceeds Rs. 5,000.
Bonus Stripping
- If an investor buys units of a scheme at Rs. 30 and later declares a 1:1 bonus issue i.e., the investor receives 1 new unit, for every unit that was bought earlier. Logically, the NAV of the scheme will halve, and its NAV would now be of value of Rs. 15. At this stage, if the investor sells the original unit at Rs. 15, a loss of Rs 15 is incurred [Rs 30 (original purchase price for the Units) minus Rs 15 (currently realised)].
- However, such capital loss is not available for setting off against capital gains, if the original units were bought within a period of 3 months prior to the record date for the bonus issue and sold off within a period of 9 months after the record date.
- In such cases, the capital loss will be treated as the cost of acquisition of the bonus units.
APPLICABILITY OF GST
AMC(s) can charge GST, as per applicable Taxation Laws, to the schemes within the limits prescribed under SEBI (Mutual Fund) Regulations.
- GST on fees paid on investment management and advisory fees shall be charged to the scheme in addition to the overall limits specified as per the Total Expense Ratio (TER) provisions.
- GST on all the fees other than investment and advisory fees shall be charged to the scheme within the maximum limit of TER.
- GST on exit load, if any, shall be deducted from the exit load and the net amount shall be credited to the scheme.
- GST on brokerage and transaction cost paid for execution of trade, if any, shall be within the limit of TER.
- The commission payable to the distributors of mutual funds may be subject to GST, as applicable in case of the ARN holder. Such tax cannot be charged to the scheme.
CHAPTER 1: Investment Landscape
CHAPTER 2 : Concept And Role Of A Mutual Fund
Chapter 3: Legal Structure Of Mutual Funds In India
Chapter 4: Legal And Regulatory Framework
Chapter 5: Scheme Related Information
Chapter 6: Fund Distribution & Channel Management Practices
Chapter 7: Net Asset Value, Total Expense Ratio & Pricing Of Units
Chapter 10 : Risk, Return And Performance Of Funds
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