Tax on income, gains from mutual funds

Income is received by mutual fund investors in the form of dividends declared on its schemes. Investors may also make capital gains — either long-term or short-term, when they redeem their units.

We discuss in brief the tax treatment at the hands of resident individuals. This is the current status and may undergo changes in the coming budget or when the direct tax code is implemented. In view of the individual nature of tax benefits, each investor is advised to consult his or her own tax consultant with respect to the specific tax implications arising out of their investments.

What is the tax payable by investors on receiving dividend?

As per current tax laws, dividends received aren't taxable at the hands of investors.

What is meant by long-term and short-term capital gain?

Long-term capital gain refers to gains made on redeeming units held for more than 12 months. If the units are held for less than 12 months, the gain is called short-term capital gain. There is a tax implication in the case of capital gains.

What is the tax to be paid on long-term capital gains?

There is a different treatment for gains made on equity-oriented funds, and on units of funds besides equity-oriented funds.

Equity-oriented funds have at least 65 per cent of their assets in equity. Currently as per tax laws, no tax is payable on the redemption or transfer of these units, provided such transaction is chargeable to the securities transaction tax.

In the case of funds that aren't equity-oriented funds, for Individuals and HUF, long-term capital gains tax in respect of units held for a period of more than 12 months will be chargeable at the rate of 20 per cent.

Capital gains would be computed after reducing the aggregate of cost of acquisition (as adjusted by cost-inflation index notified by the Central Government), and expenditure incurred wholly and exclusively in connection with transfer.

Indexation has the effect of increasing the cost of purchase as per the formula (Cost Price x index of current year / index of year of purchase). An investor will have an option to apply a concessional rate of tax of 10 per cent, provided long-term capital gains are computed without substituting indexed cost in place of cost of acquisition. Please note that education cess is payable as applicable.

What is the tax to be paid by individuals on short-term capital gains?

There is a different treatment for short-term capital gains made on equity-oriented funds, and on units of schemes which aren't equity-oriented. In the case of equity-oriented funds, short-term capital gains arising from the redemption of units of an equity-oriented fund will be taxed at 15 per cent, provided securities transaction tax has been charged.

In other cases, short-term capital gains in respect of units held for a period of less than 12 months is added to the total income. Total income, including short-term capital gains, is chargeable to tax as per the relevant slab rates.

What happens to tax on sale of investments made through Systematic Investment Plans?

In the case of Systematic Investment Plan instalments in an equity fund, each instalment is treated as a separate purchase, and any unit would have to be held for more than 12 months to qualify as long-term.

Therefore, if an investor redeems all units, only gains from those units that have been held for more than 12 months will qualify as long-term capital gains.

The gains from the remaining units will be short-term capital gains.

(Contributed by CAMS Viveka, Investor Education Team of CAMS. The views expressed herein are general practices in the Mutual Fund industry and hence may vary on a case-to-case basis).

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