Mutual Fund Taxation

The awareness of mutual fund is increasing day by day. There are different types of mutual fund available in the market according to risk and time horizon. You can invest in any mutual fund according to your financial goal and risk profile. Often we are confused about tax liability on mutual fund return. However tax rule is subject to the matter of change in every year depends upon budget of Govt of India. We are here trying to find out tax liability of mutual fund return for financial year 2012-13.
We can divide mutual fund into 2 parts for taxation point of view. One is dividend paying mutual fund and the other is non dividend paying mutual fund. So first we talk about tax implication on dividend received by mutual fund unitholder.


Tax for Dividend paying Equity Mutual Fund:
The dividend received in hand of unitholder is completely tax free. It is also tax free to the mutual fund distribution house. It means the fund house also not liable to any tax on distribution income or dividend. So in equity mutual fund dividend is tax free for unitholder and fund house both.


Now we move on towards capital gain. If we make profit and hold unit more than 12 month we have to pay Long Term Capital Gain Tax and if we hold less than 12 month (make profit) we are liable to pay Short Term Capital gain Tax.


Capital Gain for Equity Mutual Fund:
In equity oriented schemes there are no long term capital gain tax at all for all categories investor.
The Short term capital gain is different for different category investor. For individual / HUF , domestic company and NRI it is (15%+ 3% cess)15.450%, If domestic company income more than 1 Crore (subject to marginal relief)  then it is ( 15% + 5% surcharge + 3%) 16.223.


DDT for Debt Mutual Fund:
However, dividend received in hand of unitholder is completely tax free in the debt mutual fund also. But this is taxable to the mutual fund distribution house. The fund house have to pay DDT (Dividend Distribution Tax) on distribution income. It means the investor will get dividend in their hands after DDT paid by the fund house.
For individual/ HUF and NRI, DDT are (12.5% + 5% Surcharge + 3% Cess) 13.519%. For domestic company it is (30% + 5% Surcharge + 3% Cess) 32.445%.


DDT for Money Market and Liquid Mutual Fund
There are also one more category in debt mutual fund. These schemes are also same as debt mutual fund. For the purpose of DDT it has been maintained separately here.  For individual/ HUF and NRI, DDT are (25% + 5%Surcharge + 3%Cess) 27.038%. For domestic company it is (30% + 5% Surcharge + 3% Cess) 32.445%.

Capital Gain for Debt Mutual Fund:
For all type of debt mutual fund, the unit holder can pay long term capital gain tax with indexation or without indexation whichever is lower. For individual / HUF, domestic company and NRI it is (10% + 3% Cess) 10.300% without indexation and (20% + 3%Cess) 20.600% with indexation.
If domestic company, income more than 1 Crore (subject to marginal relief) then long term capital gain without indexation (10% + 5% Surcharge + 3% Cess)10.815% and with indexation (20% + 5% Surcharge + 3% Cess) 21.630%.
The short term capital gain tax levied on individual / HUF, and NRI depend on their respective income tax slab. For example, if anyone in 30% income tax slab then short term capital gain tax would be (30% + 3% Cess) 30.900%. For domestic company it would be 30.900% and if domestic company income more than 1 Crore (subject to marginal relief) then it is (30% + 5%Surcharge + 3% Cess) 32.445%.

Note that short term/long term capital gain tax will be deducted at the time of redemption of units in case of NRI investors. Securities transaction tax (STT) will be deducted on equity funds at the time of redemption and switch to the other schemes. Mutual Fund would also pay securities transaction tax wherever applicable on the securities bought / sold

If you have any query about mutual fund taxation related please feel free to ask.

Regards,

Arvind Trivedi

Certified Financial Planner
arvind.trivedi79@gmail.com