Tax is a certainty when you go out to invest in any scheme. But one has to look at various aspects to avoid such taxes. Many people who invest in Mutual Funds look out for Tax-savings. The Government of India revised various Taxation schemes for providing tax-benefits to the investor.
Starting from, April 1, 2003, all dividends distributed to investors by debt-based mutual funds were exempted from taxes. However, Mutual Funds were required to pay a dividend distribution tax of 12.5% including surcharge on the dividends. Under Section 88 of Income Tax Act, 1961 ELSS-equity-linked savings schemes can benefit by a tax-rebate on investment up to Rs 10,000 under certain pre-stated conditions. Depending on whether mutual fund comes under short-term capital asset or a long-term one, the units are liable to taxes. The Section 2(42A) describes mutual fund as short-term capital asset if it is held for less than a year whereas if the units held for more than a year they come under long-term capital asset.
Section 10(38) of the Income Tax Act exempts long-term capital gains, occurring from reallocation of a unit of mutual fund, from taxes. The rule came into being after October 1,2004 so tax is exempted if the transaction took place after this date. This rule requires the securities transaction tax is paid to the appropriate authority.
The Section 111A of the Income Tax Act states that the short-term capital gains that crop up from transfer of a unit of mutual fund is taxable@ 10% plus applicable surcharge. This is applicable to all transactions that take place after October 1, 2004 and also the securities transaction tax is paid.
Under section 88E of Income Tax Act, the security transaction tax can be rebated if the transaction represents a business income.
Capital gains are calculated after considering cost of realization as adjusted by Cost Inflation Index stated by the central government.
The Section 112 of the Act states that capital gains that are not roofed by the exemption under Section 10(38) come under various categories of taxable long-term capital gains and charge rates of tax depending on the category. A resident individual and HUF is charged 20% (plus surcharge). All Indian companies and partnership firms are taxable at 20%( plus surcharge). Whereas the foreign Companies are liable to pay 20% tax (plus no surcharge).
The unit holders are liable to pay taxes. They pay a 10% tax plus applicable surcharge if they don’t opt for the cost inflation index benefit and if they take advantage of the cost inflation index benefit they are charged 20% tax with applicable surcharge.
Under Section 115AB of the Act, 1961, long-term capital gains considered as units acquired in foreign currency by an foreign financial organization kept for a period of more than one year will be taxed@ 10%(no surcharge). The gains don’t take into account cost of acquisition.
Under Section 2(EA) of the Wealth Tax Act, 1957, units held under Mutual Funds are not liable to Wealth tax, as they are not treated as assets. Moreover units of Mutual Fund can be given as gift, thus is not liable to gift tax i.e. no tax is payable by donor or donee.
Under Section 115E of the Act, for a non-resident Indian capital gains chargeable on reallocation or transfer of long-term capital assets are taxable. If they form an Investment income, they are charged @ 20% and long-term capital gains are taxed @ 10%.
Under Section 10(23D), income of any form received by the Mutual Fund is exempt from tax. However the Income distributed to a unit holder of a Mutual Fund is taxable under Section 115R. Income distributed to individual or HUF is taxable @ 12.5% and others are taxed @ 20.0%. This tax is excused for open-ended Equity Oriented Funds.
2 thoughts on “Tax Benefits of Mutual Funds in India”
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Thanks and Regards !
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Hereâ€™s our market view on American stock market for 10th October, 2008
The stock market has collapsed – since Sept. 19 the DJIA is down 25% and the S&P 500 is down 28% and down 42% from a year ago.
How can this happen so quickly and so dramatically when so many good things have occurred? Oil is down to $82 a barrel; interest rates are very low; the dollar is up; valuation levels are extremely attractive among many blue chip stocks.
What’s the real problem? The problem that is killing the stock market is a lack of hope about the future.
Hope springs from optimism that is based on facts and history. Look at the history of America and really all of mankind. Life is full of setbacks and problems – that’s just the deal. But this too shall pass, as all scary periods have.
Doomsayers have been around forever and their batting average is zero. Buying stock is based on hope – hope for the future. If one doesn’t have hope, they shouldn’t be in this business.
So what is the best service we, as professionals, can provide for our clients?
First, discuss the fact that we are dealing with serious problems but it is not at all like 1929. The Federal Reserve and the Treasury Department are doing many things to restore confidence in the financial system. There is global coordination in attacking the problem, which is lack of confidence.
Tell your clients to look at history of our great nation and what has happened since 1776 when we faced very serious problems. The stock market actually rose steadily about six months after Pearl Harbor and until the end of WWII even though the outcome was not at all clear for several years.
No one knows when the stock market will bottom and a new bull will commence. We do know that stocks and mutual funds offer the best values we have seen since Black Monday, Oct. 19, 1987.
Almost all Americans have hope about the future of our nation, but they need help to control their normal fears.
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