TAXATION

TYPE OF MUTUAL FUND:

• Equity
• Debt
TYPE OF INCOME:
• Dividends
• Capital Gains
HOLDING PERIOD AND
CAPITAL GAINS:
• Short Term Capital Gains
• Long Term Capital Gains
TYPE OF INVESTOR:
• Resident Individuals
• NRI’S
• Domestic Company
 Income earned by mutual fund schemes is either in the
form of dividend or interest. Or capital gains, invested in the
securities market. If constituted as Trusts, exempted from
tax .
 Income earned as investor under dividend or growth
schemes, earn capital gains/losses when one sells the units,
varies in the tax treatment.
 Schemes holding more than 65% of AUM in equity shares
listed on stock exchange are equity-oriented mutual fund
schemes, rest are non-equity oriented mutual fund schemes.
• Capital gains are of two categories:
Long term and Short term.
• Long term has a holding period of more than three
years in case of non-equity( Debt) and more than one
year in equity funds.
• Gains booked before the completion of this period are
Short term Capital Gains.
 What is a Capital Gain?
It is an increase in the value of an asset or investment resulting from the price
appreciation of the asset or investment. The gain occurs when the current or
sale price of an asset or investment exceeds its purchase price
 TWO IMPORTANT PROVISIONS :

1) Exemption up to 1 lakh : Long term gains arising out of equity oriented

Mutual funds are taxable above one lakh, the first one lakh being Tax-exempt.

2) Grandfathering of Capital Gains: Earlier Capital gains from equity assets

were non–taxable before 31 January 2018.
After that to calculate tax a concept arrived called “Grandfathering of capital
gains”, Where the valuation on 31st became the base point.
Gains would be calculated for the tax purpose by taking the higher value of NAV
Or Value on 31st Jan 2018.
 Understanding the Benefit of Indexation

The rate of tax on long term capital gains from non-equity-

oriented funds is 20% with indexation.

Indexation means the cost of acquisition or the cost of purchase is

adjusted upwards to reflect the impact of inflation. The Central
Board Of Direct Taxes announces a number every year as CII.
QUES: Assume that an investor invested a sum of Rs. 1,00,000
in a debt fund in the year 2015, and sold the
same after 3 years. He got Rs. 1,25,000 as
the redemption proceeds.
The above can be calculated by using the compound interest
equation, as shown under:

A = P*(1+r)^n,

A = P*(1+r)^n; hence r = (A/P)^(1/n)-1 r = (125000/100000)^(1/3)-1

= 7.72%
Though the actual gain is Rs. 25,000; tax is not payable on the entire gain,
due to the benefit of indexation.
For the purpose of calculating taxability, the capital gain would be
adjusted for indexation. This is done by adjusting the purchase
price .
Rs. 1,00,000 X [280/254] = Rs.
1,10,236.221
The indexed capital gain would be
Rs. 14,763.78 (Rs, 1,25,000.00 – Rs.
1,10,236.22)

The rate of tax on the indexed capital gains is 20 percent, and thus the tax
liability would be Rs. 2,952.76. As can be seen, this is a reasonably low
rate of tax on the capital gain, and that too is payable only when the units
are sold and the gains are booked.
 Dividend Income and Dividend Distribution Tax:

Dividend income from mutual funds is tax free in the hands of the investor.
However, dividend is paid after deduction of Dividend Distribution Tax.
Securities Transaction Tax( STT)
Investor incurs the STT on selling / re purchasing the units of Equity funds.
It is not applicable on purchase of units , and not on debt securities or Debt
mutual fund schemes.

Tax Deducted at Source (TDS)

There is no TDS on dividend distribution or re-purchase proceeds to resident
investors. Tax regulations prescribe different rates, depending upon nature of
Investment , nature of Investor and nature of Income.

Setting of Gains /Losses under Income Tax Act :

Setting of capital losses against capital gains and other income is subject to
limitations to prevent tax avoidance.
Equity Linked Saving Schemes (ELSS)
advantage: all about 80C investments

ELSS Advantage over other

tax saving instruments:

1. Low Lock in period

2. Earn market linked
return
3. Tax free returns
Dividend Stripping :
Dividend being exempt in hands of investor, Capital loss may be available
to set off against Capital gains. A potential tax avoidance approach.

Bonus Stripping :
Bonus Stripping is used on a stock which is at a notional loss and is
issuing a bonus. After the bonus shares are gained, the original
shares are sold at a loss which can then be offset against capital
gains from other sources.
To plug the loophole, it is provided that
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