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Is the₹10-lakh tax exemption limit for dividend income only for dividend from equity shares of Indian companies, or does it also include the dividend received from mutual funds? For example, if I have ₹6-lakh income from equity shares and ₹5-lakh dividend from mutual funds (total ₹11 lakh), will I have to pay tax on the ₹1 lakh which is in excess of the ₹10 lakh, or is my entire income from mutual funds exempted?
-V Ravi Subramaniam
As per Section 10(34) of the Income Tax Act, 1961, dividends on which Dividend Distribution Tax (DDT) has been paid, is exempt from tax in the hands of the individual, up to ₹10 lakh. However, such dividends in excess of ₹10 lakh is taxable in the hands of the individual at the rate of 10 per cent (exclusive of surcharge and cess) as per Section 115BBDA of the IT Act.
The ‘dividends’ referred in Section 115BBDA does not include income distributed by an equity-oriented mutual fund to its unit holders. Income received from an equity-oriented mutual fund is exempt from tax under Section 10(35) of the IT Act.
Accordingly, the ₹6-lakh dividend received from equity shares of domestic companies (subjected to DDT) and the ₹5-lakh income received from the unit of the equity-oriented fund will be exempt from tax.
If I sell my mutual-fund units bought in 2016 in July 2018, will the net asset value (NAV) on January 31, 2018, be applicable to determine the capital gain similar to equity shares?
-V Ravi Subramaniam
As per Section 112A of the Income Tax Act, long-term capital gains on sale of an equity share in a company or a unit of equity-oriented fund in excess of ₹1 lakh will be taxed at the rate of 10 per cent (exclusive of surcharge and cess).
In case of equity-oriented funds, the concessional rate of 10 per cent is applicable, provided Securities Transaction Tax (STT) has been paid at the time of transfer. Hence, if you sell your equity-oriented mutual fund purchased in 2016, in July 2018, any resultant long-term capital gains would be taxable. Capital gain would be the difference between the value of sale consideration and the cost of acquisition.
The cost of acquisition shall be the higher of the following: actual cost of acquisition of asset; and lower of (a) the Fair Market Value (FMV) of such asset and (b) full value of consideration received or accruing on transfer of capital asset.
In case of listed units, the FMV would be the highest price of such unit quoted on a stock exchange on January 31, 2018. If the unit was not traded on January 31, 2018, the FMV would be the highest price quoted on the immediately preceding date on which the unit was traded.
In case of an unlisted unit, the NAV of such a unit as on January 31, 2018, will be regarded as the FMV.
The author is Partner, Deloitte India. Send your queries to taxtalk@thehindu.co.in
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