India: Income Tax Implications for investing in mutual funds

Income Tax Implications for investing in mutual funds in India

Dividends...!

Income received from units of a mutual fund registered with the Securities and Exchange Board of India is exempt in the hands of the unit holder. 

A debt-oriented mutual fund is liable to pay income distribution tax of 14.1625% and 22.66% on the distribution of income to individual / Hindu Undivided Fund and other persons, respectively. 

In the case of “money market mutual funds” and “liquid mutual funds” (as defined under SEBI regulations), the income distribution tax is 28.325% across all categories of investors.

Capital Gains

Long-term capital gains arising on the transfer of units of an ‘equity oriented’ mutual fund is exempt from income tax, if the Securities Transaction Tax (STT) is paid on this transaction i.e., the transfer of such units should be made through a recognised stock exchange in India (or such units should be repurchased by the relevant mutual fund). 

‘Equity oriented’ mutual fund means a fund where the investible corpus is invested by way of equity shares in Indian companies to the extent of more than 65% of the total proceeds of the fund. 

Short-term capital gains arising on such transactions are taxable at a base rate of 15% (increased by surcharge as applicable, education cess of 2% and secondary and higher education cess of 1%). If a transaction is not covered by STT, the long-term capital gain tax rate would be 10% without indexation or 20% with indexation, depending on which the assessee opts for. Short-term capital gains on such transactions are taxable at normal rates.

A taxable ‘capital loss’ (i.e., a transaction on which there is a liability to pay tax if the result were ‘gains’ instead of ‘loss’) can be set-off only against ‘capital gains’. An exempt capital loss (i.e., a transaction which is exempt from tax if the result were ‘gains’ instead of ‘loss’) cannot be set-off against taxable capital gains. 

A taxable long-term capital loss can be set-off only against long-term capital gains. However, a taxable short-term capital loss can be set-off against both short-term and long-term capital gains.

Disclaimer: The Hongkong and Shanghai Banking Corporation Limited in India (HSBC) has issued this note. This note is for general information only and is not meant to constitute and therefore should not be construed as an advice on tax matters. Prior professional tax advice analyzing individual facts and circumstances should be sought before taking any decision. As the tax laws keep changing by virtue of amendments in law, issue of administrative circulars and notifications and court rulings, there can be no assurance about the validity of the tax information contained in this publication subsequent to its release. 

No obligation or liability of any nature whatsoever is assumed by HSBC in releasing this publication. Whilst reasonable care has been taken in compiling the information, HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness.

Mutual Funds are subject to market risk. Please read the offer document carefully before investing. Terms and Conditions apply.

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