UNIT -6 : Taxation and Regulations

• For Long Term Capital Gains (LTCG), if an asset is held for more than 12 months,
the tax rate is 0% in India. On the other hand, for Short Term Capital Gains
(STCG), where the holding period is 12 months or less, the tax rate is 15% of the
gains, along with any applicable surcharge and cess. These tax rates apply to the sale
of assets such as stocks, mutual funds, and other securities.

• As per SEBI regulations, a scheme is classified as an equity scheme if at least 65% of

its average weekly net assets are invested in Indian equities. If an investor sells,
redeems, or repurchases units of an equity scheme after holding them for more than
12 months, the profit is exempt from tax. However, if the units are sold before 12
months, it results in a short-term capital gain, and the investor is required to pay
15% tax on the gains. Additionally, when exiting the scheme, investors must bear a
Securities Transaction Tax (STT) of 0.001% of the selling price value.
• if you invest in a mutual fund that is not an equity scheme (like a scheme that invests
in foreign stocks), you will have to pay capital gains tax, whether it's short-term or
long-term, when you sell your units. Even if you hold the units for over 12 months, if
the fund invests 100% in foreign equities, it's treated differently for tax purposes, and
you’ll still have to pay tax on the long-term capital gains.
• For mutual fund schemes other than equity (like debt funds, liquid schemes, gold
ETFs, etc.), the tax treatment is:
Short-Term Capital Gains (STCG): If units are sold within 36 months, the gain is
added to the investor’s total income and taxed according to their tax slab, including
applicable surcharge and cess (marginal rate of tax).
Long-Term Capital Gains (LTCG): If units are sold after 36 months:
Resident Investors: Taxed at 20% (plus surcharge and cess) with the indexation
benefit.
Foreign Institutional Investors (FII): Taxed at 10% (plus surcharge and cess)
without indexation.

Indexation Benefit is a tax benefit that helps investors adjust the purchase price of an asset
(like mutual fund units, bonds, or stocks) for inflation, to reduce the taxable capital gains. It
allows investors to increase the purchase price of their investment using a government-
provided inflation index, which results in lower taxable gains when the asset is sold.
For example, if you bought a mutual fund unit for ₹1,000 three years ago, but due to
inflation, its value today is effectively higher in real terms, the indexation benefit allows you
to adjust that ₹1,000 purchase price upwards based on inflation, reducing your taxable capital
gain when you sell the unit. This is especially useful for long-term investments as it reduces
the tax burden on capital gains.
Dividend Distribution Tax (DDT) is the tax that mutual funds or companies pay on the
dividends they distribute to investors. In India, the fund itself pays the tax before distributing
the dividend to the investors, so the investor receives the dividend after tax is deducted.

The DDT rates for different categories are as follows:

• For individuals and Hindu Undivided Families (HUF): 25% (plus surcharge and
cess).

• For others: 30% (plus surcharge and cess).

• For non-residents or foreign companies receiving dividends from an

Infrastructure Debt Fund: 5% (plus surcharge and cess).

Why Fmps Are Popular?

• Predictable Returns: FMPs offer fixed returns, allowing investors to know exactly
what they will earn if held to maturity.
• Tax Efficiency: FMPs are taxed as long-term capital gains, offering tax benefits if
held for more than three years, including indexation.
• Low Risk: They invest in high-quality debt securities, making them safer compared
to equity-based investments.
• Ideal for Medium-Term Goals: FMPs are suitable for investors looking to park
money for a fixed period (usually 3-5 years) with stable returns.
• No Exit Load: FMPs generally don’t have an exit load if held until maturity, making
them a cost-effective investment option.

AMFI (Association of Mutual Funds in India)

AMFI is the industry body that represents mutual funds in India. It was set up to promote and
regulate the mutual fund industry in the country, ensuring transparency, standardization, and
growth of the sector.

Objectives of AMFI:

1. Promote Mutual Funds: AMFI works to raise awareness about mutual funds as an
investment option, educating investors about their benefits.

2. Regulation and Standards: It helps in setting industry standards and ensuring mutual
funds operate according to SEBI (Securities and Exchange Board of India)
regulations.

3. Investor Protection: AMFI focuses on safeguarding the interests of mutual fund

investors by ensuring fair practices and resolving grievances.
 4. Development of the Mutual Fund Industry: AMFI strives to develop and grow the
mutual fund industry, facilitating better access to investment products for all types of
investors.

5. Education and Awareness: It conducts programs to educate investors, distributors,

and other stakeholders on mutual fund investments and related topics.

SEBI’s Riskometer classifies mutual funds into 5 risk categories:

1. Low Risk (Green): Least risky, investing in stable assets like bonds.

2. Moderately Low Risk (Yellow-Green): Slightly higher risk, with a mix of debt and
conservative equity.

3. Moderate Risk (Yellow): Balanced funds with both equity and debt, offering
moderate returns.

4. High Risk (Orange): Riskier funds investing in small-cap stocks or sectors with high
volatility.

5. Very High Risk (Red): Highest risk, investing in highly volatile assets like emerging
markets or speculative stocks.

SIP (Systematic Investment Plan)

SIP is a method of investing in mutual funds where you contribute a fixed amount of money
regularly (monthly or quarterly). This allows you to invest in the market consistently,
regardless of market conditions. SIP helps in averaging the cost of your investments over
time and is a disciplined way to build wealth over the long term, especially suited for
investors with a long-term financial goal.

STP (Systematic Transfer Plan)

STP allows investors to transfer a fixed amount of money from one mutual fund scheme to
another on a regular basis (monthly or quarterly). For example, you might transfer money
from a debt fund to an equity fund. This strategy helps investors gradually move into riskier
assets or shift from a low-risk to a higher-risk investment while maintaining a disciplined
approach.
SWP (Systematic Withdrawal Plan)

SWP allows investors to withdraw a fixed amount regularly from their mutual fund
investment. It is often used by retirees or those looking for regular income. With SWP, you
can decide the frequency and amount of withdrawals, and the funds will be deducted from the
mutual fund scheme in a structured manner, ensuring a steady income stream.

Dividend Payout Option

The Dividend Payout Option in mutual funds allows investors to receive dividends directly
in their bank account or as a cheque when the fund declares a dividend. This option is
suitable for investors who prefer to receive regular income from their investment. The
dividend amount depends on the performance of the fund and the decision of the fund
manager.

Dividend Reinvestment Option

The Dividend Reinvestment Option allows investors to reinvest the dividends earned from a
mutual fund back into the same fund, instead of receiving the payout in cash. This option
helps in compounding returns, as the reinvested dividend units will generate further returns.
The number of units purchased depends on the fund’s NAV on the dividend reinvestment
date. This is a good choice for investors looking to grow their investment over time without
taking immediate income.