Looking to invest in foreign equity funds to diversify your portfolio? Know the taxation aspect first

By: | Published: March 1, 2019 3:00 PM

To diversify your portfolio and bring stability in return, investing in the equities of reputed foreign companies of developed countries like the USA is a good option.

mutual fund, MF, foreign equity fund, Equity MFs, taxation of foreign equity funds, stable return, stability in portfolio, long term capital gain tax, LTCG tax, short term capital gain tax, STCG taxHaving some exposure to these funds would bring some stability to your portfolio return as the returns on such funds are more like debt funds.

To diversify your portfolio and bring stability in return, investing in the equities of reputed foreign companies of developed countries like the USA is a good option. As the markets of developed economies are relatively stable, equity return of such companies may not be very high, but the probability of suffering loss is also very less.

For example, in 2018, when most of the domestic equity mutual funds (MFs) suffered losses, but return on overseas funds, that predominantly invest in the US-based top companies, fluctuated around 6-8 per cent.

So, having some exposure to these funds would bring some stability to your portfolio return as the returns on such funds are more like debt funds.

Not only returns, even taxation of such funds is similar to that of debt funds. So, while inducting foreign equity funds in your portfolio, you should keep it in mind that tax benefits of equity investments are available only when investments are made in the equities of domestic companies.

While redeeming these funds, remember that long term capital gain (LTCG) tax of 20 per cent will be applicable after indexation, if redemption is made after 36 months from the date of investment. Otherwise, for redemption before 36 months from the date of investment, short term capital gain (STCG) tax will be applicable, which is the marginal tax rate as per the tax bracket, in which the investor falls. However, for NRI investors, 10 per cent LTCG tax (plus surcharge, if applicable and cess) is chargeable without indexation relating to units redeemed from unlisted schemes.

In case dividend payout option is opted, investors don’t have to pay any tax on dividends but the mutual fund has to deduct Dividend Distribution Tax (DDT) at source, which is 29.12 per cent (including surcharge and health & education cess) for individuals and 34.944 per cent (including surcharge and health & education cess) for investors other than individuals.

So, you have to pay tax as per the taxation of debt mutual funds, even though you invest in the equities of foreign companies.

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