Taxability of Mutual Funds

Investment in Mutual Fund Units: -

Taxability of Mutual Funds depends on various factors. Let's see the important points here.

  1. Buying of Units is one of the modes of Investment option available to the Investors. This can be either be made by you for trading or as an investment.

  2. If the units are held for regular trading purposes, then it would be a business stock.

  3. In case you are an investor, a unit of a Mutual Fund specified under section 10(23D) shall be a 'Short Term Capital Asset', if it is held by you for not more than 12 months. If it is held for more than 12 months, then the Unit would be a Long-term Capital Asset.

On this page:

Is it a Speculative Transaction?

Taxability of Mutual Funds for Business Persons: -

  1. If you are a business person, the cost of the purchase of the Mutual Fund Units would be allowed as deduction in its entirety from the sale consideration. No further benefit is available in this regard.

  2. In the case of an eligible transaction in respect of trading in derivatives referred to in clause section 2(ac) of the Securities Contracts (Regulation) Act, 1956 carried out in a recognised stock exchange, is not regarded as a "Speculative Transaction".

Definitions: Boring but Important!

For this purpose, "eligible transaction" means any transaction,-

  1. carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 or the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996 and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and

  2. which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;

"recognised stock exchange" means a recognised stock exchange as referred to in section 2(f) of the Securities Contracts (Regulation) Act, 1956 and which fulfils such conditions as may be prescribed and notified by the Central Government.

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Taxability of Mutual Funds - Deduction for Investors: -

If you are Investor, you will be eligible for deduction under section 80C to the extent of Rs.1,00,000. The following are the schemes available for deduction: -

  1. as a contribution for participation in any such unit-linked insurance plan of the LIC Mutual Fund referred to in section 10(23D), as notified by the Central Government in the name of: -

    1. in the case an individual, in his name or wife/husband or any children;

    2. in the case of HUF, in the name of any member of the HUF.

  2. as subscription to any units of any Mutual Fund referred to in section 10(23D) or from the Administrator or the specified company under any plan formulated in accordance with such scheme as notified by the Central Government;

  3. as a contribution by an individual to any pension fund set up by any Mutual Fund referred to in section 10(23D) or by the Administrator or the specified company, as notified by the Central Government;

  4. as subscription to any units of any mutual fund referred to in section 10(23D) and approved by the Board on an application made by such mutual fund in the prescribed form, if the amount of subscription to such units is subscribed only in the eligible issue of capital of any company.

Taxability of Mutual Funds is unique for each scheme. Care should be taken by the Investor that the investment is made in the proper notified Mutual Fund Schemes. This information would be available in the scheme phamplets.

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Exemptions and Taxability of Mutual Funds under Income-tax Act for Investors: -

The following incomes are exempt under section 10(35):-

  1. income received in respect of the units of a Mutual Fund specified under clause (23D);

  2. income received in respect of units from the Administrator of the specified undertaking;

  3. income received in respect of units from the specified company.

No exemption shall be applicable to any income arising from transfer of units of the Administrator of the specified undertaking or of the specified company or of a mutual fund.

However, as per section 10(38) any income arising from the transfer of a long-term capital asset, being a unit of an equity oriented fund is exempt, if -

  1. the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and

  2. such transaction is chargeable to securities transaction tax under that Chapter:

For the purposes of this clause, "equity oriented fund" means a fund-

  1. where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% (with reference to the annual average of the monthly averages of the opening and closing figures) of the total proceeds of such fund; and

  2. which has been set up under a scheme of a Mutual Fund specified under section 10(23D);

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Taxability of Mutual Funds and Special Benefits for Non Residents

Taxability of Mutual Funds and Special Benefits to Non Resident Non Corporate Entity, Foreign Companies & Off Shore Funds: -

As per section 115A in the case of a non-resident (not being a company) or a foreign company, the tax in respect in respect any income by way of-

  1. interest received from an infrastructure debt fund referred to in section 10(47) shall be 5%,

  2. income received in respect of units, purchased in foreign currency, of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India shall be 20%,

An overseas financial organisation (hereinafter referred to as Offshore Fund) shall be taxed at the rate 10% in respect of the following income-

  1. income received in respect of units [unit of a mutual fund specified under section 10(23D) or of the Unit Trust of India] purchased in foreign currency; or

  2. income by way of long-term capital gains arising from the transfer of units [unit of a mutual fund specified under section 10(23D) or of the Unit Trust of India] purchased in foreign currency,

However, no deduction in respect of any expenditure or allowance shall be allowed to the aforesaid assessees under sections 28 to 44C and section 57 in computing his or its income referred to above.

Further, no deduction shall be allowed to him or it under Chapter VI-A from the aforesaid incomes.

It shall not be necessary only for such Non Resident Non Corporate Entity & Foreign Companies to furnish under section 139(1) a return of his or its income if-

  1. his or its total income in respect of which he or it is assessable under this Act during the previous year consisted only of income referred to above; and

  2. the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.

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Taxability of Mutual Funds (including Tax on distributed income to Unit Holders): -

Income earned by a Mutual Fund is exempt under section 10(23D). Any income of -

  1. a Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or regulations made thereunder;

  2. such other Mutual Fund set up by a public sector bank or a public financial institution or authorised by the RBI and subject to such conditions as notified by the Central Government.

Taxability of Mutual Funds Taxability of Mutual Funds In India

Taxability of Mutual Funds on Distributed Income:-

Any amount of income distributed by the specified company or a Mutual Fund to its unit holders shall be chargeable to tax.

Any such specified company or Mutual Fund shall be liable to pay, within 14 days from the date of distribution or payment of such income, whichever is earlier, additional income-tax on such distributed income at the rate of-

  1. 25% on income distributed to any person being an individual or a Hindu undivided family] by a money market mutual fund or a liquid fund;

  2. 30% on income distributed to any other person by a money market mutual fund or a liquid fund;

  3. 12.5% on income distributed to any person being an individual or a Hindu undivided family by a fund other than a money market mutual fund or a liquid fund; and

  4. 30% on income distributed to any other person by a fund other than a money market mutual fund or a liquid fund;

However, any income distributed-

  1. by the Administrator of the specified undertaking, to the unit holders; or

  2. to a unit holder of equity oriented funds in respect of any distribution made from such funds,

shall not be liable to the aforesaid tax on distribution.

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TDS on Mutual Fund Incomes: -

There is no requirement for TDS deduction in respect of income from Mutual Funds.

Cautions: -

Investments in Mutual Funds are subject to Market Risk. This article is not intended to prescribe investments in Mutual Funds.

All the tax provisions explained above are as applicable on this date of August 01, 2012. The Author or Web Content provider does not accept any responsibility for any consequence arising on any decision made by the Investor or the Trader.

This Article is only for guidance. There could be inadvertent errors or changes in laws not covered in this Article at the time of decision making by the Investor or Trader. Hence, they are informed to take their consultations at the time of making Investments.

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