Mr. A will receive dividend and capital appreciation on such mutual fund. Suppose he purchased it for Rs. 100. During the year he receives Rs. 10 as dividend and at the year end the value of one unit may go up to Rs. 150. So that Rs. 50 is capital appreciation.
So let us discuss the tax on mutual funds and benefits received by Mr. A.
The Direct tax levied on such benefits are governed by Income Tax Act 1961.
As we know there are two types of benefits 1) Income received on such units as dividend or by any other name. 2) Capital appreciation on such units on sale/redemption.
Income received on such units as dividend or by any other name during the year
Any income received on such units as specified under clause 10(23D) are exempt from income tax under section 10(35).
Section 10(23D) covers all mutual funds registered under SEBI, set up by public sector bank, public financial institutions, RBI and are subject to conditions of central Govt.
So any income you receive on mutual fund during the year is exempt.
Capital appreciation on such units on sale/redemption.
If you receive any money for increase in value of units at the time of sale/redemption of such units, then it will liable for capital gain taxation.
Capital gain may be long term or short term. If you hold the units for more than a year then it is long term investment. Otherwise it is short term investment. We divide it into long term and short term since we have tax treatment/rates are different of both.
Before we discuss the tax treatment of long term and short term capital gains on sale of mutual fund, let us discuss the type of mutual fund in income tax. It is Equity oriented mutual fund and other funds.
Equity oriented mutual funds
Those mutual fund in which equity holding is more than 65% of the total portfolio and set up as specified in section 10 (23D).
Other Funds kept under debt category
Mutual funds which invest in other funds & international funds (funds in which more than 35 % exposure to international equities).
Now let us discuss the tax treatment:-
Capital Gains on Equity oriented mutual funds
The long term capital gains on equity oriented mutual funds are exempt from tax under section 10(38).
Short term capital gains on sale of equity oriented mutual funds will be taxed @ 15% on capital gains. In the above example Rs. 50 will be taxable @ 15%.
However if the total income excluding short term capital gains is less than the maximum amount not chargeable to tax ( Rs. 2,50,000 for F.Y 2014-15 & 2015-16) then the difference will be adjusted against capital gain and the balance will be taxable @ 15%.
For example if your short term capital gain is Rs. 95,000 and the total income excluding short term capital gains is Rs. 1,75,000, then the difference Rs. 75,000 ( Rs. 2,50,000-Rs. 1,75,000) will be adjusted against Rs. 95,000. Hence the balance Rs. 20,000 will be taxed @ 15%.
If you are a non resident then TDS will be deducted by the mutual fund company @15.45% for equity oriented funds and 30.9% for non equity oriented funds scheme.
Capital Gains on Debt Mutual funds
The Long Term capital Gains on Debt Mutual funds is taxed at 10% (with indexation) or 20% (without indexation) on capital gains. It is choice of taxpayer.
Short Term capital gains will be taxed at normal rates applicable to individuals.
Please refer the TDS Rate chart for F.Y 2015-16 to know the normal rates applicable to you.
For Non resident TDS will be deducted @ 20% for long term and 30% for short term.
Tax treatment for mutual fund Company
Now let us discuss the tax treatment for mutual fund Company paying dividend to the unit holders.
As we have discussed there are two types of mutual funds for income tax purpose. The treatment is as follows
Equity Oriented mutual fund scheme.
Dividend paid by the mutual funds company for equity oriented mutual fund scheme are exempt from dividend distribution Tax.
Debt Mutual funds
Dividend for Equity funds other than equity oriented mutual funds are as follows:
| Payee | Equity-oriented schemes | Debt oriented schemes/Money Market and Liquid Schemes |
|---|---|---|
| Individual /HuF | Nil | 28.84% (25% + 12%Surcharge + 3%Cess) |
| Domestic Companies/Firms | Nil | 34.608% (30% + 12%Surcharge + 3%Cess) |
| Non Resident Indians | Nil | 28.84% (25% + 12%Surcharge + 3%Cess) |
Security Transaction Tax
Securities transaction tax (STT) will be deducted on equity funds at the time of redemption and switch to the other schemes. Mutual Fund would also pay securities transaction tax wherever applicable on the securities bought / sold.
| Sale of units of Equity Oriented Mutual Fund | 0.001% |
| Sale of units Other than Equity Oriented Mutual Fund | Nil |
| Purchase of units of equity oriented mutual funds on stock exchange | Nil |
| Sale of units of equity oriented mutual funds on stock exchange | 0.001% |
Mutual Funds will also pay securities transaction tax wherever applicable on the securities bought / sold at 0.10%.