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Sunday, April 8, 2012

Mutual Fund taxation in India




As far as mutual funds in India are concerned, there are 2 types of taxes-
      
      (1)    Dividend Tax
Dividend Tax on different type of Mutual Fund schemes

Schemes
Individual/HUF/NRI
Equity oriented schemes
Nil
Debt oriented schemes
Nil


So it doesn’t matter whether a fund is Equity Oriented or Debt Oriented, dividend in the hands of investors (Individual, HUF or NRI) is tax free.
But Mutual Fund houses have to incur DDT (Dividend Distribution Tax) on their Debt Schemes and Money Market Schemes while DDT on Equity Schemes is tax-exempt.
Someone may ask that why one should bother when Mutual Fund company has to pay the tax.
And the answer is- No fund house pays the DDT from their pocket and the same is paid from the fund’s corpus. In simple words unit holders (investors of Debt/Money Market Scheme) pay this tax indirectly. NAVs of Debt/Money Market Funds are derived after taking DDT into consideration.

DDT applicable on various Mutual Fund schemes % #
Schemes
For Individual/HUF investors
For NRI investors
Equity Oriented Schemes
Nil
Nil
Effective 13.52%
Effective 13.52 %
Money Market Schemes
Effective 27.04 %
Effective 27.04%

# rounded figures after including Surcharge (5%) and Cess (3%)

           (2)    Capital gain tax on mutual funds in India

           There are 2 types of capital gain taxes applicable on mutual funds in India-

(A)   Short Term Capital Gain Tax (STCG)
Short term capital gain tax is applicable on Mutual Fund units held for a time period of 12 months or less.
STCG treatment is different for equity and debt schemes.
Schemes
Individual/HUF/NRI
Equity Oriented Funds
15.45 % effective
(15% STCG +3 % Cess)

Non-Equity Oriented  Funds (Debt/Money Market Schemes)
STCG is added to the annual income and taxed as per the tax-slab investor falls in.

(STCG (10%,20% or 30% as the tax slab of the investor) + 3 % Cess on it)



(B)   Long Term Capital Gain (LTCG)
LTCG is applicable when Mutual Fund units are held for a period over 12 months.
LTCG treatment too is different for equity and debt schemes.

Schemes
Individual/HUF/NRI
Equity oriented funds
Nil
Non-equity oriented funds
(Debt/Money Market Schemes)
10 % of LTCG (+ 3% Cess on it) without indexation

Or

 20 % (3% Cess on it) of LTCG with indexation, whichever is lower.


        10.3 % effective without indexation
     Or
        20.6 % effective with indexation

-whatever is lower

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