Dividend from MF is exempt from tax

Is dividend tax received on mutual fund (MF) under monthly investment plan or equity oriented MF tax free? What is the tax liability if MFs are held for less than a year and more than 1 year?Verinder Aggarwal

Dividend income from MF is exempt from tax irrespective of receipt from monthly investment plan scheme or equity-oriented MF. Taxation of capital gains from redemption of MF depends on the dividend being equity oriented and the period of holding.

If the units are sold after more than 12 months from the date of investment, the capital gains are long term. In case of equity oriented MF, where Securities Transaction Tax (STT) is paid on such LTCGs, the dividend is exempt from tax. If the holding is not for over 12 months, the capital gains are short term. Under such cases if STT is paid at sale, the dividend is taxable at 15.45 per cent (including education cess) in case of equity oriented MF.

In case of other MF investment — debt, liquid, ultra short term — the LTCGs are taxable at 10.3 per cent (including education cess) if indexation benefit is not claimed. If indexation benefit is claimed, the taxable rate will be 20.6 per cent (including education cess).

Short-term capital gains are taxable at maximum marginal rate as applicable to the individual.

My late husband and his two brothers have a large landed property in Kochi. The property was inherited by them from their late father who had acquired it through partition of his joint family property (matriarchal system). The joint family acquired large tract of landed property over 300-400 years ago.

The two brothers and I are now planning to sell the property. What will be the tax (wealth and IT) impact on the sale consideration received by each one of us? Will depositing the funds in infrastructure or NABARD bonds reduce the tax liability? Can we buy residential property for self-occupation and claim tax exemption? — Lakshmi Kutty

Presuming that the property has been inherited by the respective brothers in their individual capacity and not as a Hindu Undivided Family, the gains from sale of the land would be taxable as capital gains for each of the individual for their respective share. In case of inheritance, the period of holding will be counted from the date of acquisition of the property by the original owner. As the property has been held for more than 36 months, the resultant capital gains will be termed as long-term capital gains (LTCGs).

A capital gain is the difference between the net sales proceeds and the indexed cost of acquisition. The cost of acquisition will be the cost for which the original owner acquired the property as increased by cost of improvement made subsequently.

As the property has been acquired before April 1, 1981, you would have the option of taking cost as the actual cost of acquisition or Fair Market Value of the property as on April 1, 1981.While computing the LTCGs, the cost of acquisition needs to be appropriately indexed. Such LTCGs are taxed at the rate of 20.6 per cent (including education cess).

You can save tax on capital gains by investing in new residential house (provided you do not hold more than one house other than the new asset) or investing in specified bonds within a prescribed time limit (up to Rs 50 lakh). In case of investment in residential house, the deduction is restricted to lower of the amount invested in new asset or capital gains from transfer of old house.

This deduction is allowed if you purchase new house within one year before or two years after the date of transfer of the old house. In case of an under-construction house, the construction needs to be completed within three years from the date of transfer of the old house. The new house should not be sold within three years else the deduction gets revoked.

Where you are unable to make the new investment by the due date of filing the tax return, deposit the money in the Capital Gain Account Scheme with a prescribed nationalised bank to claim deduction.

In case you propose to invest in bonds (issued by the National Highways Authority of India or the Rural Electrification Corporation) ensure that the investments are not redeemed for three years to get deduction.

There are no separate wealth tax implications on sale of land. However, during the period of holding of land it is an asset liable for wealth tax.

You can save tax by investing up to Rs 20,000 in long-term infrastructure bonds or up to Rs 1 lakh in Nabard bonds under section 80CCF and section 80C, respectively.

(The author is Executive Director, Tax, KPMG)

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