Tax Implications on Mutual Funds



[Tax Planning Series]

Session 5: Tax Implications On Mutual Funds




We are glad to have you with us for our 5th Session on Tax Planning and that is...

Tax Implications on Mutual Funds

In the last few sessions of money simplified we talked about how mutual funds can be an effective investment avenue for aggressive investors, looking to kill two birds with one stone – tax planning and wealth creation. We explained the various tax-saving investment products available to you vide the mutual fund route.

Moving forward, in this session of the tax planning series, we’ll explain the tax implications of investing in mutual funds.

Yes, every investment avenue you select for tax saving has tax implications. Therefore it becomes imperative to recognise the tax implications to calculate the net returns i.e. after adjusting for tax. So in this session, let us understand the tax implications on mutual funds.

First, let us understand the factors involved in deciding the taxability of mutual funds…

Factors involved in deciding taxability of mutual funds

The taxability would depend on:
  • Type of mutual fund scheme held, whether it’s an equity oriented fund i.e. those holding over 65% of the investible corpus in Indian equities, or other than equity oriented fund i.e. those holding less than or equal to 65% of the investible corpus in Indian equities, mainly debt funds or liquid / money market mutual funds or gold funds or fund of funds.

  • Type of income earned from mutual funds (Dividends and Capital Gains)

    • Dividends – If you, as an investor, have opted for the dividend option and are in receipt of dividend income from the mutual fund scheme(s), it is tax-free under Section 10(35) of the Income-tax Act, 1961. However, there is a dividend distribution tax or DDT which is deducted at source for ‘other than equity oriented’ funds. DDT is nil in case of equity oriented funds.


    • Capital gains will be subject to tax based on the period of holding, i.e. whether long-term or short-term

      • Long Term Capital Gains – capital gains are classified as long term when the period of holding is more than 12 months in case of equity-oriented mutual fund schemes, and more than 36 months in case of other than equity-oriented mutual fund schemes

      • Short Term Capital Gains – are those when the period of holding is 12 months or less in case of equity-oriented mutual fund schemes and 36 months or less for other than equity-oriented mutual fund schemes.

  • Likewise, one’s tax status is also an important determinant i.e. whether it’s a Resident Individual; Hindu Undivided Family (HUF); Partnership Firm / Association of Person (AoP) / Body of Individuals (BoI); Domestic Company; or a NRI. You’ll recognise how in the ensuing part of this session.



Now let us see...

Tax Implications on Equity Oriented Mutual Funds
  • When you opt for the dividend option while investing in equity oriented mutual fund, the dividend received is exempt from tax i.e. dividend income is tax-free in the hands of the investor for all types of investors.

  • Moreover there is no dividend distribution tax on the dividend distributed in case of equity oriented mutual funds
Now coming to capital gains...

For Capital Gains on Equity Oriented Mutual Funds*

Short Term Capital
Gains Tax
(Period <= 12 months)

Long Term Capital
Gains Tax
(Period > 12 months)

TDS

FY 2016-17

FY 2016-17

FY 2016-17

Resident Individual / HUF

15%^

Nil

N.A.

Domestic Companies@ / Partnership Firms
/ AOP / BOI

N.A.

NRIs

STCG - 15%@ LTCG - Nil

*These are funds which attract Securities Transaction Tax (STT). STT @ 0.001% is applicable on sale of a unit of an equity oriented fund which is
settled by actual delivery/ transfer while for non-delivery based, STT is 0.025%.
^ Plus the applicable Surcharge, Education Cess and Secondary and Higher Education Cess.
@ Short term capital gain tax is deducted at the time of redemption of units in case of NRI investors

  • As you can see in the table, there is no Long Term Capital Gains Tax on equity oriented mutual fund schemes but only short term capital gains tax. Securities Transaction Tax (STT) @ 0.001% / 0.025% will be deducted on equity funds at the time of redemption i.e. sale of units or switch to the other schemes

    For individuals and HUFs, the surcharge is 15%, but applicable only if the income in the financial year exceeds Rs 1 crore. Additionally, Education Cess and Secondary and Higher Education Cess of 3% is applicable on the total amount of tax plus surcharge.

    For unit holders who are domestic companies,

  • No surcharge is levied where the income is equal to or less than Rs 1 crore. However, Education Cess and Secondary and Higher Education Cess of 3% is applicable on the total amount of tax.

  • Surcharge @ 7% where the income exceeds Rs 1 crore, but does not exceed Rs 10 crore. Additionally, Education Cess and Secondary and Higher Education Cess of 3% is applicable on the total amount of tax plus surcharge.

  • Surcharge @ 12% where the income exceeds Rs 10 crore. Additionally, Education Cess and Secondary and Higher Education Cess of 3% is applicable on the total amount of tax plus surcharge.

Tax Implication on other than Equity Oriented Mutual Funds

Dividend Income ^

Dividend Distribution Tax or DDT

(other than Equity Oriented Mutual Funds)

FY 2016-17

FY 2016-17

Resident Individual /
HUF

Tax free

28.840% (25% + 12% surcharge + 3% education cess)

Domestic Companies /
Partnership Firms /
AOP / BOI

Tax free

34.608% (30% + 12% surcharge + 3% education cess)

NRIs

Tax free

28.840% (25% + 12% surcharge + 3% education cess)

^ Received post Dividend Distribution Tax
  • As you can see in the table here, dividend income received from other than equity oriented funds is also exempt from tax irrespective of one’s tax status

  • But there’s a Dividend Distribution Tax that is deducted for other than equity oriented mutual fund scheme while they distribute dividends. It is 25% + 12% surcharge on Tax + 3% Education Cess and Secondary and Higher Education Cess on Tax and Surcharge for Resident Individuals & HUFs.

Now coming to capital gains...

For Capital Gains Tax on other than Equity Oriented Mutual Funds

Short Term Capital Gains Tax (Period <= 36 months)

Long Term Capital Gains Tax (Period > 36 months)

TDS

FY 2016-17

FY 2016-17

FY 2016-17

Resident Individual / HUF As per Tax Slab^ 20%^ with Indexation

N.A.

Domestic Companies / Partnership Firms / AOP / BOI 30%^^ N.A.
Non-Resident Indians NRIs As per Tax Slab^
  • For listed units 20%^ (with indexation)
  • For unlisted units - 10%^ (without indexation),
STCG - 30%^
LTCG –
10% (for unlisted units)^
and
20% (for listed units)^
^ Plus the applicable Surcharge, Education Cess and Secondary and Higher Education Cess.
^^plus surcharge as applicable, –and additionally education cess and secondary & higher education cess of 3% on the amount of tax plus surcharge

  • As you can see in the table here, for other than equity oriented mutual fund schemes long term capital gain tax is levied @ 20% with indexation for resident individuals, excluding applicable surcharge and cess


Before we end our learning here are…

Points to Remember...


  • Before investing and redeeming your money from mutual funds, consider the tax implications; because every investment avenue has tax implications

  • Recognise the factors involved. The tax implications in case of mutual funds would depend on: type of scheme whether equity or other than equity, the income earned from mutual funds i.e. dividends and/or capital gains, period of holding whether short term or long term and one’s tax status i.e. whether one is a resident individual, HUF, Partnership Firm / Association of Person (AoP) / Body of Individual (BoI); Domestic Company; or a NRI.

  • Dividend received is exempt from tax in the hands of the investor– both in case of equity oriented funds and other than equity oriented funds except that the latter are subject to dividend distribution tax.

  • In case of equity oriented mutual funds, there’s no tax on long term capital gains if investment held for more than 12 months

  • In case of other than equity oriented funds, long term capital gains tax would be applicable if holding period is more than 36 months.

So to end our learning exercise today, we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

Just Click On The Link Below.


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