MF switch attracts provisions of capital gains

Updated: Apr 30 2006, 05:30am hrs
I am of Indian origin settled in the US. Till last year, I was on greencard and a few months back, I received citizenship of the US. Then, I had applied for OCI Certificate also, which I was granted. Now, my questions are as follows :

1) Would I be considered as NRI

2) What would happen to my NRE account

3) What would be my status and tax liabilities from next FY onwards

Raghvendra Rao

The point-by-point answer to your queries are:

1. You were so far an NRI and now you will be a PIO. However, the rights and obligations of an NRI and a PIO are largely the same.

2. Your NRE account can be continued just the same.

3. Nothing changes so far as your status and tax liabilities are concerned.

I am an employee of a semi-Government organisation. I have been investing Rs 6,000 since the last 10 years in UTI ULIP scheme and the same matured on March 14, 2006.

I received Rs 1,25,000 as against an investment of Rs 60,000. Being a balanced mutual fund using indexation, I earned a long-term capital gain (LTCG) of Rs 36,633.29 and short-term capital gain (STCG) of Rs 3,091.69.

Without indexation, LTCG was Rs 62,600.07 and STCG was Rs 3,091.69.

My questions are:

1) Which tax I should pay (with or without indexation)

2) Can I save the above capital gains tax by purchasing capital gain bond within six months

Gautam Pujari

1. LTCG is taken as a separate block and charged to tax at a flat rate of 20%. In the case of securities, including equities and units of MFs, the option of paying tax at 10% on the difference between the sale proceeds and the cost of acquisition, loosely called as gains without indexation is available to the assessee. No deductions are allowed under Chapter-VIA like u/s 80C, 80D etc, for LTCG.

STCG is included in the other income of the assessee and taxed at the normal rate applicable to him.

2. Yes, the tax on all long-term capital gains which are chargeable to tax can be saved by investing within six months the amount of capital gains in infrastructure-related Bonds of NHAI, or REC u/s 54 EC. The lock-in period is three years. The current interest rate is around 5.5% and this is fully taxable.

I have holdings in mutual funds. In the event of switching in to another fund, how will the date of investment be reckoned in the switched-in fund for the purpose of calculating capital gains in the event of final sale out afterwards Will the investment date in the switching-in fund be the date of switching or will it be considered as the date of investment of the switched-out fund.

SR Sonawane

The switch attracts provisions of capital gains. This means that the switch is a new transaction in itself. For the first leg of the transaction, that is at the time of switch, the switch price would be the selling price. During the second leg, at the time of sale, the switch price would be the cost price.

I would request you to inform me whether there is any tax on:

1. Shares & equity MF sold within one year. What if the sold amount (principal plus gain) is reinvested in another equity

2. ELSS sold after three years.

Mohnish Basu

Shares and equity MF sold within one year, as you know, are short-term capital gains taxed at 10%. You cannot save tax on short-term capital gains by investing in another equity/MF.

ELSS is nothing but an equity-oriented fund and the tax laws applicable to an equity fund will apply. This means that long-term gains (holding period of over 12 months) will be tax-free.

This is as per the tax laws as applicable currently. It is possible that as and when the government introduces the EET system of taxation, ELSS funds would be taxed on maturity. However, all this is speculation and we will know for certain only when EET is introduced. As of now, ELSS sold after three years is tax-free.

I am studying MBA in an unaided autonomous institute. I have paid Rs 1,20,000 as annual fees. Now, the college is suddenly forcing us to pay a 10.2% service tax on the annual fees. Is the college's stand justifiable


Yes, the college is justified in doing so since the related service tax provision was not in place at the time of your admission.

Your complaint should be against the government for not providing for cases like yours while bringing a new service in their net. You will do well by going to a consumer grievance redressal forum.

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