Tax issues concerning Indian Mutual Fund:

Mutual Fund registered with SEBI and as such is eligible for benefits under section 10 (23D) of the Income Tax Act, 1961 to have its entire income exempt from income tax under the provisions of Section 10(35), this exemption does not apply to income arising on “transfer” (switching) of units of a mutual fund. The Mutual Fund receives all income without any deduction of tax at source under the provisions of Section 196(iv) of the Act.

By virtue of section 45 of the Wealth Tax Act, 1957, wealth tax is not applicable on  Mutual Fund and units held under the Schemes of Mutual Fund are not treated as assets within the meaning of section 2(ea) of the Wealth Tax Act, 1957 and are, therefore, not liable to Wealth-Tax.

Tax issues concerning Unit holders

I. Equity Oriented Funds – Tax Treatment of Investments

A.  Tax on income in respect of units
As per the section 10(35) of the Act, income received by investors under the schemes of any Mutual Fund is exempt from income tax in the hands of the recipient unit holders.

B. Dividend Distribution Tax:
By virtue of proviso to section 115 (R) (2) of the Act, equity oriented schemes are exempt from income distribution tax. As per section 115T of the Act, equity oriented fund means such fund where the investible funds are invested by way of equity shares in domestic companies (as defined under the Act) to the extent of more than sixty-five percent of the total proceeds of such fund.

C. TDS on the income of units:

As per the provisions of section 194K and section 196A of the Act, where any income is credited or paid on or after 1st April 2003 by a Mutual Fund, no tax is required to be deducted at source.

D. Tax on capital gains
i)  Long Term Capital Gains
Long term capital gains on transfer of units of equity oriented fund where security transaction tax is paid are exempt u/s 10(38) of the Act. However such long term capital gains arising to a company shall be taken into account in computing the book profit and income tax payable under section 115JB.

ii) Short term capital gains
Units held for not more than twelve months preceding the date of their transfer are short-term capital assets. Capital gains arising from the transfer of short-term capital assets being unit of an equity oriented scheme which is chargeable to STT is liable to income tax @ 15% under section 111 A and section 115 AD of the Act. The said tax rate is increased by the surcharge, if applicable.

iii) Securities Transaction Tax (STT)
As per Chapter VII of Finance (No. 2) Act, 2004 relating to Securities Transaction Tax (STT), as amended by Finance bill 2013 (section 98), with effect from June 01, 2013, the STT is payable by the seller at the rate of 0.001% on the sale of unit of an equity oriented scheme to the Mutual Fund.  The STT is collected by the Mutual Fund at the source.

With effect from 01st April 2008:

• the deduction under section 88E of the Act has been discontinued, and
• the amount of STT paid by the assessee during the year in respect of taxable securities transactions entered into in the course of business will be allowed as deduction under section 36 of the Act subject to the condition that such income from taxable securities transactions is included in the income computed under the head “Profits and Gains of business or profession”.

E. TDS on Capital Gains
(i) Resident Investors
As per Central Board of Direct Taxes (‘CBDT’) circular No.715 dated 8th August 1995, in the case of resident unitholders no tax is required to be deducted from capital gains arising at the time of redemption of the units.

(ii) For NonResident Investors
Long-term capital gains
No tax is deductible from the proceeds payable to nonresident investors from long-term capital gains arising out of redemption of units of an equity oriented fund.

Short term capital gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 1 (b) (i) (C)}, the Mutual Fund is liable to deduct tax @ 15% on short-term capital gains. The TDS is to be increased by the applicable surcharge.

(iii) In the case of a Company
Other than a Domestic Company (foreign company, as defined under the Act):
Long-term capital gains
No tax is to be deducted from the proceeds payable to nonresident investors from long-term capital gains arising out of redemption of units of an equity oriented fund.
 
Short term capital gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 2 (b) (vii)}, the Mutual Fund is liable to deduct tax @ 15% on short-term capital gains. The TDS will have to be increased by the applicable surcharge.

(iv) Foreign Institutional Investors (FIIs) (as defined under the Act): In the case of Foreign Institutional Investors (FIIs), no tax would be deductible at source from the capital gains arising on redemption of units in view of section 196 D (2) of the Act.

Retirement Benefit Plan, Unit Linked Insurance Plan, Equity Linked Savings Scheme: Tax benefits under section 80 C
The contribution made by individuals and HUFs in the above Plans / Scheme will be eligible for the deduction of the whole of the amount paid or deposited subject to a maximum of Rs.1,50,000/- under Section 80 C of Income Tax Act, 1961 as provided therein.

Rajiv Gandhi Equity Saving Scheme (RGESS)

The Rajiv Gandhi Equity Saving Scheme (RGESS) was launched after the 2012 Budget. Investors whose gross total income is less than Rs. 12 lakhs can invest in this scheme. Upon fulfillment of conditions laid down in the section 80CCG, the deduction is lower of, 50% of the amount invested in equity shares or Rs 25,000.

II. Other than Equity Oriented Funds – Tax Treatment of Investments

Tax issues concerning Unit holders

A. Tax on income in respect of units
As per section 10(35) of the Act, income received by investors under the schemes of Mutual Fund is exempt from income tax in the hands of the recipient unitholders.

B. Dividend Distribution Tax:
i) For Individual (Resident and NRI) and HUF:
As per section 115R of the Act, the dividend distribution is 25% plus surcharge. With effect from 1 October 2014, for the purpose of determining the tax payable, the amount of distributed income has to be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributed by the Mutual Fund.

ii) For NonIndividual:
As per section 115R of the Act, income distribution tax shall be levied at 30% plus. With effect from 1 October 2014, for the purpose of determining the tax payable, the amount of distributed income has to be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributed by the Mutual Fund.

C. TDS on income of units

As per the provisions of section 194K and section 196A of the Act, where any income is credited or paid on or after 1st April 2003 by a Mutual Fund, no tax is required to be deducted at source.

D. Tax on capital gains
(i) Long Term Capital Gains
Resident Unitholders
Any long term capital gain arising on redemption of units by residents is subject to treatment indicated under Section 48 and 112 of the Act. Long-term capital gains in respect of units held for more than 12 months is chargeable to tax @ 20% after factoring the cost inflation index or tax at the rate of 10% without indexation, whichever is lower. The said tax rate is to be increased by the surcharge, if applicable.

NonResident Unitholders
Under section 115 E of the Act, Long-term capital gains on transfer of unlisted units arising after April 01, 2012 will be subjected to the income tax at the rate of 10%. However, no benefit of Currency Inflation Indexation or the Cost Inflation Indexation is available. Long term capital gains on listed units will be taxable @ 20% After providing indexation. Tax rates are to be increased by the applicable surcharge.

FIIs
As per section 115 AD of the Act, long-term capital gains on the sale of units are to be taxed @ 10% and short term gains are to be taxed@ 30%. Such gains, in either case, would be calculated without indexation benefit as the first and second provisos to section 48 do not apply to FIIs by virtue of section 115 AD (3) of the Act. The applicable tax rates are to be increased by the applicable surcharge.

ii) Short Term Capital Gains
Units held for not more than twelve months proceeding the date of their transfer are short-term capital assets. Capital gains arising from the transfer of short-term capital assets will be subject to tax at the normal rates of tax applicable to such assessee.

E. TDS on capital gains
i) Resident Investors
As per Central Board of Direct Taxes (‘CBDT’) circular No.715 dated 8th August 1995, in the case of resident unitholders no tax is required to be deducted from capital gains arising at the time of redemption of the units.

ii)   for NonResident Investors
Long Term Capital Gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 1 (b) (i) (D)}, the Mutual Fund is liable to deduct tax @ 20% on long-term capital gains.

Short Term Capital Gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 1 (b) (i) (K)}, the Mutual Fund is liable to deduct tax @ 30% on short-term capital gains.

iii) Other than a Domestic Company:
Long Term Capital Gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 2 (b) (viii)}, the Mutual Fund is liable to deduct tax @ 20% on long-term capital gains.

Short Term Capital Gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 2 (b) (ix)}, the Mutual Fund is liable to deduct tax @ 40% on short-term capital gains.

(iv) FIIs:
In the case of Foreign Institutional Investors (FIIs), no tax would be deductible at source from the capital gains arising on redemption of units in view of section 196 D (2) of the Act.

 Cess and Surcharge:
The TDS is to increased by the applicable surcharge.

Certain common provisions for equity oriented funds and other than equity oriented funds

1. Double Taxation Avoidance Agreement (DTAA)
As per CBDT Circular No. 728 dated October 30, 1995, in the case of remittance to a  country with which a DTAA is in force, the tax is to be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee. For the unitholder to obtain the benefit of a lower rate available under a DTAA, the unit holder is required to provide the Mutual Fund with a certificate obtained from his Assessing Officer stating his eligibility for the lower rate.

2. Short-Term Capital Losses
As per section 94(7), if any person acquires units within a period of 3 months prior to the record date fixed for declaration of dividend or distribution of income and sells or transfers the same within a period of 9 months from such record date, losses arising from such sale to the extent of income received or receivable on such units, which are exempt under the Act, will be ignored for the purpose of computing his income chargeable to tax.

Further, as per Section 94(8), where additional units have been issued to any person without any payment, on the basis of existing units held by such person then the loss on sale of original units shall be ignored for the purpose of computing  income chargeable to tax, if the original units were acquired within 3 months prior to the record date fixed for receipt of additional units and sold within 9 months from such record date. However, the loss so ignored shall be considered as the cost of acquisition of such additional units held on the date of sale by such person.

3. Investment by Trusts:
Investment in units of the Mutual Fund rank as an eligible form of investment under section 11(5) and section 13 of the Act read with Rule 17C(i) of the Income Tax Rules, 1962 for Public Religious & Charitable Trust.

4. Higher TDS if PAN not available:
With effect from 01st April 2010, a new provision (section 206AA) has been inserted in the Act. As per this provision, any person entitled to receive any sum or income or amount, on which tax is deductible shall furnish his Permanent Account Number (PAN) to the person responsible for deducting such tax, failing which tax shall be deducted @ 20% or the prescribed rate, whichever is higher. The applicable surcharge, education cess, and secondary & higher education cess will also be deducted from such amount of TDS.

4. Wealth Tax
Units of Mutual Fund are not covered under the definition of ‘assets’ under section 2(ea) of the Wealth Tax Act, 1957, and hence the value of investment in units is completely exempt from Wealth Tax.

5. Gift Tax
The Gift Tax Act, 1958 has abolished the levy of Gift Tax in respect of gifts made on or after 1st October 1998. Thus, gifts of units on or after 1st October 1998 are exempt from Gift Tax. Further, subject to certain exceptions, gifts from persons exceeding Rs.50,000/- are taxable as income in the hands of donee pursuant to section  2(24)(xiv) of the Act read with section 56(2)(vi) of the Act.