With the change in taxation rules, individuals investing in mutual funds need to comply with the existing tax provisions to avoid any deviation.
Accelerating investment by individuals in the stock market has led the government to reinstate tax on long-term equity-oriented mutual funds which were exempt from tax for more than a decade. Determination of taxability of mutual funds depends on various factors such as the type of mutual funds (debt-oriented or equity-oriented), holding period (long term or short term), listing on stock exchanges (listed or unlisted instruments) etc. With the change in taxation rules, individuals investing in mutual funds need to comply with the existing tax provisions to avoid any deviations.
Equity-Oriented Mutual Funds
Equity-oriented fund refers to units of the Unit Trust of India or a fund wherein investment in equity shares in domestic companies exceeds 65 per cent of the total proceeds of such fund.
Debt-Oriented Mutual Funds
Debt mutual funds refer to schemes in which a significant proportion of assets under management is principally invested in fixed income securities, including bonds and debentures.
Individuals may opt for any of the following options of mutual funds:
# Growth option: Profits made by the scheme are invested back into the scheme, which increase the net asset value of the fund
# Dividend reinvestment option: Dividends are declared but additional units are issued in lieu of cash dividend payouts
# Dividend option: Profits or dividends are distributed to the unit holder from time to time
Applicable surcharge and health and education cess payable in addition to taxes
** The cost of acquisition of units held as on January 31, 2018 would be higher of the following:
# Actual cost of acquisition, or
# Lower of Fair Market Value or full value consideration arising on such transfer
Points to be kept in mind while computing taxability of income from mutual funds:
# Dividend earned from mutual funds is exempt from tax
# Benefit of basic exemption limit can be availed for capital gains
# Residents can avail rebate of Rs 2,500 or the tax amount (whichever is lower), if income does not exceed Rs 3,50,000
# Short-term capital loss can be set off against LTCG and STCG. However, long-term capital loss can be set-off against LTCG only
# Loss remaining after set-off during the relevant financial year can be carried forward for 8 assessment years and the capital loss set-off provisions will apply
It is also imperative to note here that the tax return forms have separate schedules to report capital gains based on the holding period, type of asset and exemptions, if any. This makes it critical for taxpayers to compute the capital gains as per the rules in force. Dividends from mutual funds are tax-free but it is mandatory to disclose the same under exempt income in the India tax return form.
Taxation of LTCG on redemption of equity-oriented funds which were exempt during previous years may seem unfair in the eyes of the individuals. However, respite is provided to tax payers since gains prior to January 31, 2018 is not taxable due to the grandfathering clause.
Keeping in mind the changing risks, rewards and taxation related to various types of investments, there is a high probability of individuals looking at change in the composition of their investment portfolio. Concerted decisions should be taken keeping in mind the risk appetite of the individual, period of investment and relative tax considerations compared to other investment avenues.
(By Tapati Ghose, Partner, Deloitte India, and Robin Bose, Assistant Manager with Deloitte Haskins and Sells LLP)