Dividends from MFs are tax-free for the investor

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: I studied the analysis given by you about the growth and dividend reinvestment options of mutual funds. My question is whether the dividend given by mutual fund is taxable income - i.e., does the investor has to pay tax on it.

—Kanti Patel

Dividends from mutual funds are tax-free for the investor. However, on dividends from non-equity funds there is a dividend distribution tax of 14.1625% applicable that is payable directly by the mutual fund.

Recently on a visit to India I purchased a house in Bangalore. Eventually I intend to use it to stay in if I return to India. But that's still years away. In the meanwhile, I intend to put it out on rent. What are the tax implications of rental income on NRIs like me?

—Ashok Kaul

Tax payable on rental income depends upon several factors like (i) Municipal ratable valuation and the place where the property is located such Delhi, Chennai, Mumbai, Kolkata, etc, (ii) Fair rent assessed on the basis of rents fetched by similar properties in the neighbourhood (iii) Standard rent applicable to those cities under the Rent Control Acts of respective states, (iv) Actual rent and (v) Unrealised and irrecoverable rent.

You can first deduct from the lease rental, municipal taxes paid and thereafter a standard deduction of 30% for repairs, insurance, etc.

The interest payable on housing loan is also deductible.

The resultant figure is to be added to your other income exigible to tax.

Computation of tax on house rent is a complicated matter. It is better to employ an accountant to file the tax returns if you have rental income.Incidentally, if your tenant is not an individual or an HUF, he is required to apply tax deduction at source before paying you the rent.

Recently, I read that investments in Post Office schemes and Senior Citizen Saving Scheme will be eligible for the Sec 80C benefit. What is the effective date of this amendment? In other words, from which date can I make the investments so that I can avail of the tax advantage?

—Noushad

Investments in Senior Citizen Saving Scheme and Post Office Term Deposits of five years only have been granted the Sec 80C benefit. Other post office schemes and term deposits of lesser duration are not eligible for the Sec 80C benefit. Also, any investment made during the FY 07-08 will get the tax advantage. To that extent, the beneficial amendments are retrospective in nature.

Last week, the government reintroduced the bonus on post office monthly income scheme. After this, what would be the effective rate of return on the investment? Secondly, has the interest on Senior Citizen Savings Scheme and term deposits been exempted too?

—Madhur

Earlier, the monthly income scheme of the post office offered a 10% bonus. This was discontinued in February 2006. Now instead of the erstwhile 10% bonus, a 5% bonus has been introduced. This takes the effective rate to 8.9% pa. However, note that the interest is fully taxable. The interest on term deposits as well as Senior Citizen Saving Scheme too is fully taxable. It is only the principal investment on which Sec 80C offers a tax break.

My PPF A/C completed its term of 15 years and now I have got it extended for another block period of 5 years. Kindly advise the tax status of my investments/earnings/withdrawals during the extended period of 5 years after the proposed EET regime is implemented.

—Sharma

As far as PPF maturity goes, the FM clearly stated that it is the intention of the government to move to an EET based system of taxation. This means, investments like those under Sec 80C which enjoy a deduction from income would be taxed upon maturity.

As of now, there is no proposal to tax such investments. However, the FM has stated that he has appointed a committee which will devise the structure and form of an EET system and present it to the Parliament. Only when it is passed, will there be a semblance of clarity, hopefully. This includes ELSS (Sec 10(38)), LIC proceeds (Sec 10(10D)) etc.

For saving my taxes can I invest in SIPs (systematic investment plans)? What is the tax benefit associated with SIPs?

—Geetanjali

SIP is nothing but investing periodically, say monthly, bi-monthly or six monthly in an MF scheme. In other words, it is akin to what recurring deposit is with respect to investing in fixed deposits.

Therefore, SIP per se, does not offer any tax benefit as it is not a product but a strategy for investing. The tax benefit u/s 80C is offered by ELSS schemes of MFs. However, you can invest in ELSS using the strategy of SIPs.