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Session 20: Understanding Tax Implications on Mutual Funds



We are glad to have you with us for our Twentieth Session - Understanding Tax Implications on Mutual Funds

So let us now begin with our learning session today.

In our previous session we told you how you can avail of tax saving benefits by investing in mutual funds. But do you know, the gains you make from your investments in mutual funds may be taxable?

So whenever you select any form of investment, make sure that you are well versed with the taxation part of it too. Knowing the tax implication will help you understand the net returns (after adjusting for tax) you will enjoy on your investments.

So, let us see what are the tax implications of investing in mutual funds. But before that, let us see what are the...

Factors determining tax status of mutual funds

  • (First you need to know the...) Type of Mutual Fund (...you are investing in; whether it qualifies under equity mutual fund or debt mutual fund)

    • Equity Funds (...You see, any fund holding over 65% of its assets in equity shares in domestic companies qualifies as an equity oriented fund from a taxation perspective.)

    • Non-Equity Funds (...are those that hold less than 65% of their portfolio in equities and equity related instruments. They can be debt funds, debt oriented hybrid funds or liquid and money market mutual funds )

  • Type of Income (...In mutual funds, you may earn income in the form of dividends and /or capital gains.)

    • Dividends (...While investing in mutual funds, if you have opted for the dividend option and are in receipt of dividend income from the mutual fund scheme(s), it is tax free in your hands as an investor.)

    • Capital Gains (...It is the profit that you make from your investment in a mutual fund scheme)

  • (But the...) Period of holding and Capital Gains (...are important to determine the capital gain tax on your mutual funds. So your capital gains could be either long term capital gain or short term capital gain.)

    • Long Term Capital Gain (...In mutual funds, any holding over a period of 1 year is considered as long term. So if you make a gain on your investment in a mutual fund scheme that you have held for over 1 year, it will be classified as Long Term Capital Gain)

    • Short Term Capital Gain (...If your holding in a mutual fund scheme is less than 1 year i.e. if you withdraw your investment in a mutual fund scheme before 1 year, after making a profit, then the profit will be considered as Short Term Capital Gain)

  • Tax Status (...your tax status is also important to determine the tax implication on your investment in a mutual fund.)

    • (So you may be investing as a...) Resident Individual (...or...) Hindu Undivided Family (HUF)

    • Partnership Firm / Association of Person (AoP) / Body of Individual (BoI) (...whether incorporated or not)

    • (Or you may be investing as a...) Domestic Company

    • (...In case your residential status is...) NRI (...then your residential status may have an impact on the tax implication of your mutual fund investment. And we'll explain to you how.)

Tax Implication on Equity Mutual Fund Investments...

Type of unit holder Distribution Tax
  FY 2014-15
Resident Individual/HUF NIL
Resident Partnership Firms/AOP/BOI NIL
Domestic Companies NIL
NRIs NIL

  • (In case you have opted for the dividend option while investing in an equity oriented mutual fund, it is noteworthy that the...) Dividend received from an equity oriented scheme is exempt from tax (...as dividend income is tax free in the hands of the investor.)

  • (Moreover there is...) No dividend distribution tax borne by the mutual fund house on the dividend distributed by them in case of equity mutual funds

For Capital Gains on Equity Mutual Funds
  Short Term Capital Gains Tax
(Period < 1 Year)
Long Term Capital Gains Tax
(Period > 1 Year)
TDS
  FY 2014-15 FY 2014-15 FY 2014-15
Resident Individual / HUF 15% Nil -
Domestic Companies / Partnership Firms / AOP / BOI 15% Nil Nil
NRIs 15% Nil STCG - 15% ^
LTCG - Nil ^
^ Plus applicable surcharge and secondary and higher education cess. Securities Transaction Tax (STT) @ 0.025% on redemptions / switch over

  • (As you could see that...) There is no Long Term Capital Gains Tax on equity mutual fund schemes (...So, by investing in equity mutual fund schemes for the long-term i.e. for a period of more than 12 months, you will not be liable to pay any long term capital gains tax.)

  • (But in case if you've booked profits in the short-term i.e. within a period of less than 12 months, you'll be liable to pay...) Short Term Capital Gains Tax on equity oriented mutual funds @ 15%

  • Securities Transaction Tax (STT) @ 0.025% (...will be deducted on equity funds at the time of redemption i.e. sale of units or switch to the other schemes)

Apart from this, a Surcharge @10% is levied in case you are an individual investor or an HUF, whose income exceeds Rs 1 crore.

Also Surcharge @ 5% is levied for domestic corporate unit holders whose income exceeds Rs 1 crore, but is less than 10 crore. In case where the income exceeds 10 crore, a surcharge is levied @ 10%.)

Tax Implication on Debt Mutual Fund Investments...

  Dividend Income Dividend Distribution Tax - Liquid / Money Market Schemes Dividend Distribution Tax - Debt Schemes (Other than Infrastructure Debt Funds)
  FY 2014-15 FY 2014-15 FY 2014-15
Resident Individual / HUF Tax free 28.325%
(25% + 10% surcharge +
3% education cess)
28.325%
(25% + 10% surcharge +
3% education cess)
Domestic Companies / Partnership Firms / AOP / BOI Tax free 33.99%
(30% + 10% surcharge +
3% education cess)
33.99%
(30% + 10% surcharge +
3% education cess)
NRIs Tax free 28.325%
(25% + 10% surcharge +
3% education cess)
28.325%
(25% + 10% surcharge +
3% education cess)

  • (As seen here in the table...) Dividend income received is exempt from tax, in case of debt mutual fund schemes as well

  • (But there's a...) Dividend Distribution Tax (...that...) is deducted by debt mutual fund schemes while they distribute dividends (...It is @ 25% plus 10% surcharge and 3% cess for individuals, and 30% plus 10% surcharge and 3% cess for corporates.)

For Capital Gains Tax on Non-Equity / Debt Mutual Funds
  Short Term Capital Gains Tax
(Period < 1 Year)
Long Term Capital Gains Tax
(Period > 1 Year)
TDS
  FY 2014-15 FY 2014-15 FY 2014-15
Resident Individual / HUF As per Tax Slab 10% without Indexation
OR
20% with Indexation
(whichever is lower)
Nil
Domestic Companies / Partnership Firms / AOP / BOI 30% Nil
NRIs As per Tax Slab STCG - 30% ^
LTCG - 20% (if listed) ^
(After Providing for Indexation)
^ Plus applicable surcharge and secondary and higher education cess.

  • (Here in this table you can see that...) Long Term Capital Gains on debt mutual fund schemes are taxable @ 10% without indexation or 20% with indexation, whichever is lower

  • (And in case if you book profits in the short-term i.e. within a period of less than 12 months, you'll be liable to pay...) Short Term Capital Gains Tax on Debt mutual funds @ 30% or as per your tax slab

  • (And in case you are an NRI, then you should note that...) Tax Deduction at Source (TDS) on capital gains will take place for NRIs (...after providing indexation benefit if applicable)

Now before we end our learning session today, here are some points you need to remember...


Points to Remember...

  • Mutual fund schemes holding at least 65% of its assets in equity shares in domestic companies , enjoy equity oriented tax status

  • (While...) Mutual fund schemes holding less than 65% of its assets in equities are classified as non-equity scheme (...from a taxation angle)

  • Profits from schemes held for more than 1 year, attract Long Term Capital Gains Tax

  • Profits earned from schemes held for less than 1 year, is liable for Short Term Capital Gains Tax

  • There is no Long Term Capital Gains Tax on equity oriented mutual fund schemes

  • Long Term Capital Gains on debt mutual fund schemes is taxable @ 10% without Indexation and 20% with Indexation (...whichever is lower)

  • Dividend Distribution Tax is deducted by the fund house (...at applicable rates...) while distributing dividend income on debt mutual fund schemes

  • (Last but not the least...) TDS is applicable only on gains made by NRIs

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.



Thank You For Participating!

Disclaimer: The contents of this document are only for informative purposes and are not to be used or considered to be an offer to sell or buy units of Franklin Templeton Mutual Fund schemes. This video is for information purposes only, provided on an 'as is' basis. Nothing in it should be construed as personal financial advice. You are responsible for your own investment decisions and you should seek advice concerning suitability from your investment adviser regarding any of the investments mentioned. The video is for personal non-commercial use only and may not be copied, stored, redistributed or broadcast in any way. We recommend you read the complete Terms of Use.


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