Mutual Fund TAXATION A to Z

TAXATION INFORMATION

Tax treatment for the Investors (Unit Holders)

 

The information given is included only for general purpose and is based on advise received by the AMC regarding the law and practise currently in force in India and the Investors/ Unit holders should be aware that the relevant fiscal rules or their interpretation may change. As is the case with any investment, there can be no guarantee that the tax position or the proposed tax position prevailing at the time of an investment in the Scheme will endure indefinitely. In view of the individual nature of tax consequences, each Investor / Unit holder is advised to consult his / her own professional tax advisor.

As per the taxation laws in force and Chapter VII of the Finance (No. 2) Act, 2004 pertaining to Securities Transaction Tax (STT), the tax benefits / consequences as applicable, to the HDFC Mutual Fund in respect of its Mutual Fund schemes (being an equity oriented fund / other than equity oriented fund / money market mutual fund / liquid fund) and investors investing in the Units of its Mutual Fund Schemes [on the assumption that the units are not held as stock-in-trade] are stated as follows:

 1. Tax Benefits / Consequences to the Mutual Fund

HDFC Mutual Fund is a Mutual Fund registered with the Securities & Exchange Board of India and hence the entire income of the Mutual Fund will be exempt from income-tax in accordance with the provisions of Section 10(23D) of the Income-tax Act, 1961 (the Act).

The Mutual Fund will receive all income without any deduction of tax at source under the provisions of Section 196(iv) of the Act.

On income distribution, if any, made by the Mutual Fund, additional income-tax is payable under section 115R of the Act, in the case of its Schemes (other than equity-oriented funds i.e. such fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% of the total proceeds of such fund). 

Upto May 31, 2011, the additional income-tax on distribution of income to an individual / Hindu Undivided Family (HUF) shall be payable by the mutual fund at the rate of 13.519% (including applicable surcharge, education cess and secondary and higher education cess) and at the rate of 21.63% (including applicable surcharge, education cess and secondary and higher education cess) on distribution of income to any other investor. The additional income-tax on distribution of income by a money market mutual fund or a liquid fund shall be payable at the rate of 27.038% (including applicable surcharge, education cess and secondary and higher education cess).

With effect from June 1, 2011, the additional income-tax on distribution of income by a money market mutual fund or a liquid fund to an individual / HUF shall be payable by the mutual fund at the rate of 27.038% (including applicable surcharge, education cess and secondary and higher education cess) and at the rate of 32.445% (including applicable surcharge, education cess and secondary and higher education cess) on distribution of income to any other investor. 

The additional income-tax on distribution of income by any other fund to an individual/ HUF shall be payable at the rate of 13.519% (including applicable surcharge, education cess and secondary and higher education cess) and at the rate of 32.445% (including applicable surcharge, education cess and secondary and higher education cess) on distribution of income to any other investor.

As per the Act, a money market mutual fund means a money market mutual fund as defined in the SEBI (Mutual Fund) Regulations, 1996 and a liquid fund means a scheme or plan of a mutual fund which is classified by the SEBI as a liquid fund in accordance with the guidelines issued by it in this behalf under the SEBI Act, 1992 or regulations made thereunder.

The availability of credit for dividend distribution tax in the hands of the non-resident investor would depend upon the tax laws of the country of which he is a resident and/ or the applicable tax treaty of such country with India.

Securities Transaction Tax 

(ii) Securities Transaction Tax (STT)
is levied on the value of taxable securities transactions as under:
		By
/ Sale of equity shares	.1%*	/Seller
of units of equity oriented mutual fund (delivery based ) on recognized stock exchange #
of units of equity oriented mutual fund (delivery based ) on recognized stock exchange #	.001%
of equity shares, units of equity oriented mutual fund (non delivery based)	.025%
of an option in securities	.017%
of an option in securities, where option is exercised	.125%
of a futures in securities #	.010%
of unit of an equity oriented scheme to the Mutual Fund #	.001%
# Effective from 1st June, 2013.

2. Tax Benefits / Consequences to Unit holders 

i. Income-tax

All Unit holders

Income received, otherwise than on transfer (subject to the exemption of long-term capital gains provided for in section 10(38) of the Act, discussed elsewhere in this Statement), in respect of units of a mutual fund would be exempt from tax under Section 10(35) of the Act.

・     Tax Deduction at Source

All Unit holders 

No income-tax is deductible at source, on any income distribution by the Mutual Fund under the provisions of Section 194K and 196A of the Act.

・     Capital Gains Tax
Foreign Institutional Investors
Long-term capital gains on sale of Units, held for a period of more than twelve months, would be taxed at the rate of 10% (plus applicable surcharge, education cess and secondary and higher education cess) under Section 115AD of the Act (subject to the exemption of long-term capital gains provided for in section 10(38) of the Act, discussed elsewhere in this Statement). Such gains would be calculated without indexation of cost of acquisition. 

Short-term capital gains would be taxed at 30% (plus applicable surcharge, education cess and secondary and higher education cess) (subject to the concessional rate of tax provided for in Section 111A of the Act, discussed elsewhere in this Statement).

As per Section 111A of the Act, short-term capital gains on sale of units of an equity-oriented fund, where such transaction of sale is chargeable to STT, shall be subject to tax at a rate of 15 per cent (plus applicable surcharge, education cess and secondary and higher education cess).

Exemption of capital gain from income tax

・     As per Section 10(38) of the Act, any long-term capital gains arising from the sale of units of an equity-oriented fund where such transaction of sale is chargeable to STT, shall be exempt from tax.

Income by way of long term capital gain of a company shall be taken into account in computing the Book profit and income-tax payable under Section 115JB (Minimum Alternate Tax)[MAT]. The matter is however not free from doubt in case of Corporate Foreign Institutional Investors.

Other Unit holders

・     Long-term capital gains in respect of Units, held for a period of more than twelve months, will be chargeable under Section 112 of the Act, at concessional rate of tax, at 20% (plus applicable surcharge, education cess and secondary and higher education cess) (subject to the exemption of long-term capital gains provided for in Section 10(38) of the Act, discussed elsewhere in this Statement).

・     The following amounts would be deductible from the full value of consideration, to arrive at the amount of capital gains:

・     Cost of acquisition of Units (as adjusted by Cost Inflation Index notified by the Central Government in case of long term capital gain) and

・     Expenditure incurred wholly and exclusively in connection with such transfer (excluding any sum paid on account of STT)

・     However, where the tax payable on such long-term capital gains, exceeds 10% (plus applicable surcharge, education cess and secondary and higher education cess) of the amount of capital gains computed before indexation, such excess tax shall not be payable by the Unit holder, at his option.

・     In case of resident individuals and Hindu Undivided Families, where taxable income as reduced by long-term capital gains, is below the basic exemption limit, the long-term capital gains will be reduced to the extent of the shortfall and only the balance long-term capital gains will be subjected to the flat rate of income-tax (plus education cess and secondary and higher education cess).

As per Section 111A of the Act, short-term capital gains on sale of units of an equity oriented fund where such transaction of sale is chargeable to STT shall be subject to tax at a rate of 15 per cent (plus applicable surcharge, education cess and secondary and higher education cess). Further in case of resident individuals and HUFs where taxable income as reduced by short-term capital gains, is below the basic exemption limit, the short-term capital gains will be reduced to the extent of the shortfall and only the balance short-term capital gains will be subjected to the flat rate of income-tax (plus education cess and secondary and higher education cess).

Exemption of capital gain from income tax

・     As per Section 10(38) of the Act, any long-term capital gains arising from the sale of units of an equity-oriented fund where such transaction of sale is chargeable to STT, shall be exempt from tax.

Income by way of long term capital gain of a company shall be taken into account in computing the Book profit and income-tax payable under Section 115JB [MAT]. 

・     As per the provisions of section 54EC of the Act and subject to the conditions and investment limits specified therein, capital gains (subject to the exemption of long-term capital gains provided for in section 10(38) of the Act, discussed elsewhere in this Statement), arising on transfer of a long- term capital asset shall not be chargeable to tax to the extent such capital gains are invested in certain notified bonds within six months from the date of transfer.

・     As per the provisions of Section 54F of the Act and subject to the conditions specified therein, in the case of an individual or a HUF, capital gains (subject to the exemption of long-term capital gains provided for in section 10(38) of the Act, discussed elsewhere in this Statement) arising on transfer of a long term capital asset (not being a residential house) are not chargeable to tax if the entire net consideration received on such transfer is invested within the prescribed period in a residential house. If part of such net consideration is invested within the prescribed period in a residential house, then such gains would not be chargeable to tax on a proportionate basis. For this purpose, net consideration means full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

All Unit holders 
Under the provisions of Section 94(7) of the Act, loss arising on sale of Units, which are bought within 3 months prior to the record date (i.e. the date fixed by the Mutual Fund for the purposes of entitlement of the Unit holders to receive income or additional units without any consideration, as the case may be) and sold within 9 months after the record date, shall be ignored for the purpose of computing income chargeable to tax to the extent of exempt income received or receivable on such Units.
Under the provisions of Section 94(8) of the Act, where any person purchases units ('original units') within a period of 3 months prior to the record date, who is allotted additional units without any payment and sells all or any of the original units within a period of 9 months after the record date, while continuing to hold all or any of the additional units, then any loss arising on sale of the original units shall be ignored for the purpose of computing income chargeable to tax. The amount of loss so ignored shall be deemed to be the cost of purchase of the additional units as are held on the date of such sale.

Tax Deduction at Source
All Unit holders 
No income-tax is deductible at source from income by way of capital gains under the present provisions of the Act in case of residents. However, the provisions of section 195 of the Act may apply to non-residents (other than Foreign Institutional Investors and long-term capital gains exempt under section 10(38) of the Act).

Tax deducted at source pertaining to NRI Investors$
	Term Capital Gain	Term Capital Gain
Oriented Schemes	.995% ##
than Equity Oriented schemes (Listed)	.99%	.66%@
than Equity Oriented schemes (Unlisted)	.99%	.33%

## Subject to NRI's having Permanent Account Number in India
$ As per the Finance Act 2012, with effect from July 1, 2012, a list of transactions is proposed to be specified, wherein the rate for tax deduction at source needs to be determined by the assessing officer. In case the transaction of sale of mutual fund units by an NRI gets covered within such list, then an application would be required to be made to the assessing officer to determine the tax deduction at source rate
@ after providing for indexation

In the case of foreign companies the rate of tax to be deducted at source on short-term capital gains referred to in section 111A would be 15% (plus applicable surcharge, education cess and secondary and higher education cess) and at the rate of 40% (plus applicable surcharge, education cess and secondary and higher education cess) in case of short-term capital gains (other than under section 111A), unless a lower withholding tax certificate is obtained from the tax authorities, and at the rate of 20% (plus applicable surcharge, education cess and secondary and higher education cess) in case of long term capital gains, unless a lower withholding tax certificate is obtained from the tax authorities.

With effect from 1 April 2010, where tax is deductible under the Act, and the deductee has not furnished a Permanent Account Number (PAN) to the deductor, tax should be deducted at source at the highest of the following rates: 

・     At the rate specified in the Act

・     At the rates in force

・     At the rate of 20% (plus applicable surcharge and education cess and secondary and higher education cess )

・     Gift of Units 
With effect from 1.10.2009, as per the provisions of section 56(2)(vii) of the Act, certain specified property transferred, without consideration / adequate consideration, exceeding specified limits, are taxable in the hands of the recipient individual / HUF (subject to certain exceptions). 

The term "property" includes shares and securities. Units of a mutual fund could fall within the purview of the term "securities".

As per the Act, "property" would refer to capital assets only.

・     Clubbing of income 
Subject to the provisions of section 64(1A) of the Act, taxable income accruing or arising in the case of a minor child shall be included in the income of the parent whose total income is greater or where the marriage of the parents does not subsist, in the income of that parent who maintains the minor child. 

An exemption under section 10(32) of the Act, is granted to the parent in whose hand the income is included upto Rs. 1,500/- per minor child. When the child attains majority, the tax liability will be on the child. 

・     Deduction under section 80C 
As per section 80C, and subject to the provisions, an individual / HUF is entitled to a deduction from Gross Total Income upto Rs. 1.00 lac (along with other prescribed investments) for amounts invested in any units of a mutual fund referred to in section 10(23D) of the Act, under any plan formulated in accordance with such scheme as the Central Government may notify.

・     Securities Transaction Tax 
All Unit holders 

As per Chapter VII of the Finance (No. 2) Act, 2004 pertaining to STT, the STT shall be payable by the seller at the rate 0.25 per cent on the sale of a unit of an equity-oriented fund to the mutual fund.

OTHER BENEFITS

Investments in Units of the Mutual Fund will rank as an eligible form of investment under Section 11(5) of the Act read with Rule 17C of the Income-tax Rules, 1962, for Religious and Charitable Trusts.

TAX TREATY BENEFITS

A non- resident investor has an option to be governed by the provisions of the Act or the provisions of a Tax Treaty that India has entered into with another country of which the non- resident investor is a tax resident, whichever is more beneficial to the non- resident investor. 

The provisions of Section 195 and/or Section 197 of the Act would need to be complied and also documents will have to be furnished by the non- resident investor in this regard.

ii. Wealth-tax

Units of the Mutual Fund are not treated as assets as defined under Section 2(ea) of the Wealth-tax Act, 1957 and therefore would not be liable to wealth-tax.

iii. Gift-tax

The Gift-tax Act, 1958 has ceased to apply to gifts made on or after October 1, 1998. Gifts of Units of the Mutual Fund would therefore, be exempt from gift-tax.

The above Statement of Possible Direct Tax Benefits / Consequences sets out the provisions of law in a summary manner only and is not a complete analysis or listing of all potential tax consequences of the purchase, ownership and disposal of mutual fund units. 

The statements made above are based on the tax laws in force (including the amendments made by the Finance Act, 2011), Chapter VII of the Finance (No. 2) Act, 2004 pertaining to Securities Transaction Tax, and as interpreted by the relevant taxation authorities as of date. 

The proposals of the Draft Direct Taxes Code Bill, 2010 have not been considered therein. Investors/Unit Holders are advised to consult their tax advisors with respect to the tax consequences of the purchase, ownership and disposal of mutual fund units.

 Src: Hdfcfund.com

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