What are the taxes applicable on mutual funds?

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What are the taxes applicable on mutual funds?
Investments into mutual fund schemes like other financial investments attract the liability to pay tax on the gains made on the investment. Different taxes are levied in case of debt and equity-oriented mutual fund schemes. Further, tax rates are also changed from time to time and in the current scenario changes implemented in the 2013-2014 financial budget have become effective from June 1, 2013.

Let us know the tax implication on different fund schemes

Dividend distribution tax (DDT): DDT i.e. a tax levied on companies and fund houses for any amount declared or distributed as dividend to investors. Dividend rate is declared after factoring in the DDT i.e. fund houses deduct the appropriate DDT and declare dividend rate net of dividend distribution tax.

For liquid or money market schemes, DDT is charged @ 25% for retail investors as well as HUFs. For debt funds, the DDT tax rate for individuals and HUFs has been increased from 12.5% to 25%. For any other person i.e. a firm or corporate, DDT is charged @ 30%. For equity-linked schemes no DDT is charged. However, an important point to take note of is that DDT is deducted by the companies and corporates and is not taxable in the hands of investors.

The prescribed rate of DDT is applicable in case of dividends that were announced on or any date later than June 1, 2013.

Securities Transaction Tax (STT) : Securities transaction tax or STT levied on each of the buy and sell transaction of securities listed on the Indian bourses is also applicable on equity-oriented mutual fund scheme as nearly 60-70% of the total corpus in such schemes is invested into equities. With effect from 1st June'2013, STT on equity-linked schemes as well as exchange traded funds is charged @ 0.001% for the 2013-2014 financial year.

Capital Gain Tax : Profit earned on mutual fund schemes is also eligible for capital gains tax. Tax treatment is dependent on the term for which the scheme is held by the investor i.e. long or short-term. For equity-linked schemes, long term capital gain tax is not charged while short term capital gain tax on capital gain realized during the holding period of 1 year or less is charged @ 15%.

Long term capital gain tax on non-equity mutual fund schemes is charged @ 10% without indexation or 20% with indexation (plus education cess and surcharge) whichever is less. Know about indexation. While, computation of short term capital gain tax is done by adding the short-term capital gain to the total income which is then taxed according to the slab rate.

TDS: For resident Indians or domestic investors, TDS is not deducted from sale proceeds of their investment into mutual fund schemes. However, in case of NRI investors TDS is deducted at the time of redemption or switch into some other scheme from the sale proceeds. The rate at which the TDS is taxed is dependent on the fact whether it is a long-term or short-term capital gain. Also, effective 1st June'2013, a surcharge @ 10% would be charged in case the income of NRI surpasses Rs. 1 crore.


Story first published: Friday, August 30, 2013, 9:55 [IST]
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