Mutual Funds & Taxation

Feb-12-2010 

 

 By S Choudhary

Types of Mutual Fund

In terms of investment objective, Mutual Funds are classified as Equity fund, debt Fund & balanced fund.

Equity Fund –
In these schemes corpus of the fund mainly invest in the equities. These schemes are highly risky because return on the investment depends on the share market. In Equity Fund scheme investors have the option to dividend, capital appreciation etc. These schemes are also called growth scheme. Growth scheme is more useful for long term investment because share market is volatile and returns in these schemes totally depend on the share market.

Debt Fund –
In these schemes corpus of the fund mainly invest in the debt market i.e government securities, debentures, bonds and other money market instruments. Debt Fund schemes are less risky than the growth schemes. In debt fund schemes investors get the steady return. Return in these schemes depends on the interest rates in the market. Invested fund is more secure in these schemes.

Balanced Fund –
In these schemes corpus of the fund invest in both equity and debt in a proportion. Growth in Balanced fund schemes is moderate. Balanced funds do not only depend on the stock market. Investors get in these schemes capital appreciation and steady return. These funds are less risky comparing to equity funds.

Mutual Fund & Taxation

Types of Mutual  Fund as per Income Tax Act

Although as discussed earlier that mutual fund can be classified as Equity Oriented fund, Debt Oriented Fund and Balanced Fund but in the income tax point of view mutual funds are only classified as equity oriented fund and debt oriented fund.

Equity Oriented Fund –

If more than 65% of proceeds of the fund invested in the shares of equity shares of domestic company then the fund treated as equity oriented fund. Percentage of investment of the total proceeds of the fund shall be computed with reference to the annual average of the monthly average of the opening and closing figure.

Debt Oriented Fund –
If a fund is not equity oriented fund then it will be treated as debt oriented fund.

STT on Mutual Fund –
STT Payable on purchase & Sale of a unit of equity oriented mutual fund through a recognised stock exchange and sale of unit of an equity oriented fund to the mutual fund.

Rates of STT

Type of Transactions	Rate of STT	Who has to pay STT
Purchase & Sale of units of an equity oriented fund through a recognised stock exchange (Delivery based)	0.125%	Both buyer and seller
Purchase & Sale of units of an equity oriented fund through a recognised stock exchange (Non-Delivery base)	0.025%	Seller
Sale of units to a mutual fund	0.25%	Seller

Deduction u/s 80C for Tax Saver Scheme –
Resident Individual & HUF get deduction u/s 80C for investment in tax saver schemes subject to maximum Rs. 100000/-. Minimum, locking period for the tax saver schemes is three years.

Income from Mutual Fund Exempted u/s 10(35) –
Regular dividend payout or re-invested is exempted u/s 10(35). However Income from Transfer of units is not exempted.

Short Term Gain from transfer of Units

If units of mutual fund are not held for more than 12 months then it will be treated as short term assets and any gain from transfer of units is treated as short term capital gain.

Short Term Gain from transfer of units of equity Oriented fund is taxable @ 15% u/s 111A for the Asstt Year 2010-11
Short Term Capital Gain from transfer of units of debt Oriented fund is not taxable u/s 111A. It will be taxable as slabs applicable to the assessee.

Long Term Capital Gain from Transfer of units of Mutual Fund
 
If units of mutual fund are held for more than 12 months, then it will be treated as long term capital assets and any gain from transfer of such units is treated as long term capital gain.

Long Term Capital Gain From Transfer of units of equity oriented fund-

Long term Capital Gain from transfer of units of  equity oriented fund is exempted u/s 10(38).

Long Term Capital Gain from Transfer of units of debt oriented fund –
If the indexation cost benefit is taken by the assessee, long term capital gain from transfer of units of debt oriented fund is taxable @ 20% u/s 112. However following long term gain taxable @ 10%:
a)     If listed units are transferred and, benefit of indexation is not taken.
b)     If units are transferred (purchased by an overseas financial organisation in foreign currency) [Sec 115AC].

Deduction u/s 80C to 80U not available –
Deduction u/s 80C to 80U is not available in respect of long term capital gain taxable u/s 112 and short term capital gain taxable u/s 111A.However deduction u/s 80C to 80U allowed against Short term capital gain, which is not taxable u/s 111A.

Loss incurred in the case of bonus Stripping [Sec 94(8)]  –
 Any loss arising on purchase & sale of original units shall be ignored for computation of taxable income, and the amount of loss so ignored is deemed to be the cost of additional units held on the date of transfer if the following conditions are satisfied:
a)     any person buys or acquires any units within a period of three months prior to the record date; (these units called original units)
b)     such person is allotted additional units without any payment on the basis of holding of such units on such date (These units called additional units)
c)     such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any part of the additional units referred to in clause (b),

Table showing rated of tax on STCG & LTCG and other Provisions

	STCG on Equity oriented fund	STCG on Debt oriented fund	LTCG on Equity Oriented Fund	LTCG on Debt oriented fund	STCG/LTCG on units of US-64
Rate of Tax	15%	Taxable as slabs applicable to the assesee	NIL	If indexation benefit taken @ 20% If Indexation benefit not taken and sold through recognised stock exchange @ 10%	NIl
Deduction u/s 80C to 80U	Not Allowed	Allowed	NA	Not Allowed	NA
Relief if other income of resident individual & HUF is below exemption limit	Exemption Limit- (Net Taxable Income – such STCG)	Such STCG is not taxable with special rate the no question of relief	NA	Exemption Limit – (Net Taxable Income – such LTCG)	NA