Mutual Funds Taxation in India- Your Ready Reckoner for FY14-15

Income from Mutual Funds can either be in the form of Capital Gains (Short-term or Long-Term) arising out of redemption/sale of units or Dividends distributed by Mutual Fund Schemes.

As per current tax laws, Dividend declared by Mutual Funds is tax-free in the hands of investor for Individuals/HUFs, Domestic Corporates as well as NRIs, however, respective Mutual Fund scheme need to pay Dividend Distribution Tax (DDT) on the declared dividend and reduces the NAV of the scheme by the distributed dividend and DDT.

Budget-2014 has proposed some important changes wrt taxation of Other than equity-oriented Mutual Funds

Here is a brief summary of proposed changes:

[1] Change in duration for consideration of long-term capital gains – As per the budget proposal, minimum holding period of units (for other than equity oriented) has been increased from 12 months to 36 months.
As per the latest update the same shall be effective for all redemption/switch-out of units carried out after July 10, 2014

[2] Change in taxation of Long Term Capital Gains Tax – As per the budget proposal, Long Term Capital Gains (for other than equity oriented) will be taxed at a flat rate of 20% with indexation, whereas earlier it was minimum of 10% (w/o indexation) and 20% (with indexation).
As per the latest update the same shall be effective for all redemption/switch-out of units carried out after July 10, 2014

[3]Change in Dividend Distribution Tax calculation – As per the budget proposal, Dividend Distribution tax (for other than equity oriented) has to be calculated on “Gross” distributed income, whereas, earlier it was calculated on “Net” distributed income.
As per the recent understanding the same shall be effective from Oct 1, 2014 onward


Comprehensive guide to Mutual Funds Taxation in India for FY14-15

Long-term Capital Gains Taxation of Mutual Funds FY14-15
(units of equity oriented mutual fund schemes held for more than 12 months
and 36 months in case of other units)
Fund Cateogry Resident Individual/HUF Domestic Corporate NRI
Equity-oriented* NIL NIL NIL
Other than Equity-oriented** 20% with indexation + 10% Surcharge#
+ 3% Cess
= 20.6% or 22.66%
20% with indexation + Surcharge as applicable##
+ 3% Cess
= 21.63% or 22.66%
20% with indexation + 10% Surcharge#
+ 3% Cess
= 20.6% or 22.66%

Short-term Capital Gains Taxation of Mutual Funds FY14-15
(units of equity oriented mutual fund schemes held for less than or equal to 12 months
and 36 months in case of other units)
Fund Cateogry Resident Individual/HUF Domestic Corporate NRI
Equity-oriented* 15% + 10% Surcharge# + 3% Cess
= 15.45% or 16.995%
15% + Surcharge as applicable## + 3% Cess
= 16.225% or 16.995%
15% + 10% Surcharge# + 3% Cess
= 15.45% or 16.995%
Other than Equity-oriented** 30%^ + 10% Surcharge# + 3% Cess
= 30.9% or 33.99%
30% + Surcharge as applicable## + 3% Cess
= 32.445% or 33.99%
30% + 10% Surcharge# + 3% Cess
= 33.99%
Dividend Distribution Tax Rates (payable by the scheme) FY14-15
Fund Cateogry Resident Individual/HUF Domestic Corporate NRI
Equity-oriented* NIL NIL NIL
Other than Equity-oriented 25% + 10% Surcharge + 3% Cess
= 28.325%
30% + 10% Surcharge + 3% Cess
= 33.99%
25% + 10% Surcharge + 3% Cess
= 28.325%
Tax deducted at source (Applicable only to NRI Investors) FY14-15
Fund Cateogry Short Term Capital Gain Long Term Capital Gain
Equity-oriented* 15% NIL
Other than Equity-oriented 30% ^ 20% @

* – Securities transaction tax (STT) will be deducted on Equity-oriented schemes at the time of redemption/ switch to the other schemes/ sale of units at the rate of 0.01%
** – For redemption/switch-out of units from April 1, 2014 to 10 Jul, 2014, holding period for long term capital gains eligibility will be more than 12 months and taxation will be minimum of 10% w/out indexation and 20% w/ indexation as earlier. For redemption/switch-out of units after 10 Jul, 2014, new rule for minimum holding period and taxation at 20% w/ indexation will be applicable
# – Surcharge at the rate of 10% to be levied in case of individual/ HUF unit holders where their income exceeds Rs 1 crore. (Effective from 1 April 2013)
## – Surcharge at the rate of 5% to be levied for domestic corporate unit holders where the income exceeds Rs 1 crore but less than 10 crores and at the rate of 10%, where income exceeds 10 crores. (Effective from 1 April 2013)
^ – Assumed for highest tax bracket, actual tax rate depends on applicable tax slab.
@ – After providing for indexation


Dividend Stripping: The loss due to sale of units in the schemes (where dividend is tax free) will not be available for set off to the extent of the tax free dividend declared; if units are:
(A) bought within three months prior to the record date fixed for dividend declaration; and
(B) sold within nine months after the record date fixed for dividend declaration.

Bonus Stripping: The loss due to sale of original units in the schemes, where bonus units are issued, will not be available for set off; if original units are:
(A) bought within three months prior to the record date fixed for allotment of bonus units; and
(B) sold within nine months after the record date fixed for allotment of bonus units. However, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such unsold bonus units.


Disclaimer: Above illustration is meant for information purposes only and does not constitute any legal or tax advice. Readers are advised to consult their tax consultants to know the exact nature of consequences of tax, if any.


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