Taxation in MF
• Tax rules differ for equity and debt schemes and also for
Individuals, NRIs, OCBs and corporates.
• Three types of taxation in MFs :
– Capital Gains Tax
– Securities Transaction Tax (STT)
– Dividend Tax
Equity Linked Savings Scheme (ELSS) attracts tax benefit
under 80-C of IT act
Capital Gains Tax
• Long Term Capital Gains (More than 12 months holding
period) - 0%
• Short Term Capital Gains (Less than or equal to 12
months holding period) - 15% + Surcharge
Capital Gains Tax in Equity MF
Schemes
• As per SEBI Regulations, any scheme which has
minimum 65% of its average weekly net assets invested
in Indian equities, is an equity scheme.
• If the mutual fund units of an equity scheme are sold /
redeemed / repurchased after 12 months, the profit is tax
exempt.
• However if units are sold before 12 months it results in
short term capital gain. The investor has to pay 15% as
short term capital gains tax.
• While exiting the scheme, the investor will have to bear a
Securities Transaction Tax (STT) @ 0.001% of the value
of selling price.
• Investors in all other schemes have to pay capital gains
tax, either short term or long term.
• In case a scheme invests 100% in foreign equities, then
such a scheme is not considered to be an equity scheme
from taxation angle and the investor has to pay tax even
on the long term capital gains made from such a scheme.
Debt funds, Liquid schemes, Gold ETF,
Short term bond funds etc.
• Long Term Capital Gains (More than 36 months holding
period) - For Residents – 20% with indexation benefit
- FII – 10% without indexation benefit
• Short Term Capital Gains (Less than or equal to 36
months holding period) - Marginal Rate of Tax Profit
added to income (As per the tax slab)
• In case such units are sold within 36 months, the gain is
treated as short term capital gains. The same is added to
the income of the tax payer and is taxed as per the
applicable tax slab including applicable surcharge and
cess depending on the status of the tax payer.
Indexation Benefit
• Indexation is a procedure by which the investor can get
benefit from the fact that inflation has eroded his returns.
• Indexation works on the simple concept that if an
investor buys a unit @ Rs. 10 and sells it @ Rs. 30 after
5 years, then his profit of Rs. 20 per unit needs to be
adjusted for the inflation increase during the same time
period. This is because inflation reduces purchasing
power.
• If during the same time, inflation has increased by 12%,
then the adjusted cost of the unit purchased (at today’s
price) would be Rs. 10 * (1 + 12%) = Rs. 11.2.
• So his profit would be Rs. 30 – Rs. 11.2 = Rs. 18.8.
• The cost inflation index is notified by the Central
Government (form 1981 up to 2015-16). The same is used
by the tax payer for calculating long term capital gains.
• An investor purchased mutual fund units in January 2006 of
Rs.10,000. The same was sold in the previous year for
Rs.25,000. Long term capital gains applicable is as follows:
• FII - Without availing indexation benefit - Pay 10% on
Rs,15,000 (Rs.25000 – Rs.10,000) = Rs.1,500
• Resident - Calculate indexed cost of acquisition
(Rs.10,000 X 1081/ 497) = Rs.21,751,
Capital gains = Rs.25,000 – Rs.21,751 = Rs.3,249,
Tax@20% on Rs.3249 = Rs.650
DIVIDEND DISTRIBUTION TAX
• The dividend declared by mutual funds in respect of the
various schemes is exempt from tax in the hands of
investors.
• In case of debt mutual funds, the AMCs are required to
pay Dividend Distribution Tax (DDT) from the
distributable income. This ensures ease in tax collection.
However, in case of equity funds no DDT is payable.
• The rates for DDT are as follows:
• For individuals and HUF – 25% (plus surcharge and
other cess as applicable)
• For others – 30% (plus surcharge and other cess as
applicable)
• On dividend distributed to a non-resident or to a foreign
company by an Infrastructure Debt Fund – 5% (plus
surcharge and other cess as applicable)
Fixed Maturity Plan
• A fixed maturity plan is a close ended debt fund for a
specified period. The maturity of the papers invested in
is matched with the duration of the plan.
• Consider a case where Investor A invests Rs.100,000 in
a bank fixed deposit @9% for 3 years and Investor B
invests Rs.100,000 in a 3 year FMP. The indicative yield
of the FMP is assumed also to be at 9%. We shall
analyze the tax benefit of investing in an FMP.
• For Investor A, the interest income per annum is 100,000
X 9% = Rs.9,000. Each year the investor would have to
pay tax of Rs.2,700 (30%, assuming he is taxed at the
maximum marginal rate). Total tax payable in 3 years is
Rs.8,100.
• For Investor B, since the investment is over 36 months, it
would qualify as long term capital gains.
• When the investor entered the fund, the cost inflation
index was at 939 and when he exited at maturity the cost
inflation index had risen to 1081.
• Thus the new indexed cost of acquisition will become
Rs.100,000 X 1081/939 = Rs.115,122
• Now the profit will be equal to 115,122 – 100,000 =
Rs.15,122
• So the tax payable will be equal to 15,122 * 20% =
Rs.3,024.
• The point to be observed here is that FMP is giving a
higher return (post tax) as compared to a bank FD. This
is true only if the investor is in the 30% tax bracket.
• However Bank fixed deposit offer premature withdrawal
facility; hence they offer better liquidity as compared to
FMP.
