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  • Tax Issues regarding Mutual Fund
  • Tax Issues as to Unit Holders- A
  • Tax Issues as to Unit Holders- B
  • Provisions for Equity and Non-Equity Funds
All About Tax All About Tax

A. Taxation of investing in Mutual Fund SchemesThe information stated below is based on UTI Mutual Fund's understanding of the tax laws [Income Tax Act 1961 as amended by the Finance (No.2) Act 2014] and is only for the purpose of providing general information to the investors of the Mutual Fund Schemes (Schemes). The information/interpretations/requirements provided may undergo modifications due to changes in regulatory dispensation or otherwise. As in the case with any investment there can also be no guarantee that the tax position prevailing at the time of investment in the Schemes will endure indefinitely.

Further statements with regard to tax position mentioned herein, is on the assumption that the units are not held as stock-in-trade and below are merely indicative, not exhaustive, expressions of opinion, interpretative, subject to any judicial/administrative rulings/orders/interpretations, and are not representations of the Mutual Fund to induce any investor to acquire units whether directly from the Mutual Fund or indirectly from any other person/s by the secondary market operations and UTIMF/UTIAMC UTI Trustee Company shall not be responsible for the same in any manner. Thus the prospective investors should not treat the contents of this section as advice relating to legal, taxation, investment or any other matter and are advised to consult its/his or her own tax/legal consultant with respect to the tax implications arising out of his or her or their participation in the Schemes and the approvals/registrations etc. which are required to be obtained by the investor for making investment/transactions.

Tax issues concerning Mutual Fund : UTI Mutual Fund is a Mutual Fund registered with SEBI and as such is eligible for benefits under section 10 (23D) of the Income Tax Act, 1961 ("the Act") to have its entire income exempt from income tax.

The Mutual Fund receives all income without any deduction of tax at source under the provisions of Section 196(iv) of the Act.

As per section 115TA of Chapter XII-EA (Special provisions relating to tax on distributed income by Securitisation Trusts) (income distributed to the Pass Through Certificate holders) inserted w.e.f. 1st June 2013:
a) any amount of income distributed by the securitisation trust (as defined) to its investors (as defined) shall be chargeable to tax and such securitisation trust shall be liable to pay additional income-tax on such distributed income at the rates specified therein,
b) Provided that no such tax shall be chargeable/payable in respect of any income distributed by the securitisation trust to any person in whose case income, irrespective of its nature and source, is not chargeable to tax under the Act (which will include UTI Mutual Fund, if holding any securitized debt instrument or securities issued by the securitization trust, as its entire income is exempt under section 10(23D) of the Act).

As per Section 10(35A) of the Act, inserted w.e.f. 1st April 2013, any income by way of distributed income referred to in section 115TA of Chapter XII-EA of the Act received from a securitisation Trust by any person being an investor (as per the definition, will include UTI Mutual Fund if holding any securitized debt instrument or securities issued by the securitization trust) of the said Trust shall not form part of total income and hence be exempt from income tax.

By virtue of section 45 of the Wealth Tax Act, 1957, wealth tax is not chargeable in respect of net wealth of a Mutual Fund, hence UTI Mutual Fund is not liable to pay Wealth Tax under the provisions of the Wealth Tax Act, 1957.

I. Equity Oriented Funds - Tax Treatment of Investments

A. Tax on income in respect of units

As per the section 10(35) of the Act, income received by investors under the schemes of any Mutual Fund is exempt from income tax in the hands of the recipient unit holders.

B. Dividend Distribution Tax:

By virtue of proviso to section 115 (R) (2) of the Act, equity oriented schemes are exempt from income distribution tax. As per section 115T of the Act, equity oriented fund means such fund where the investible funds are invested by way of equity shares in domestic companies (as defined under the Act) to the extent of more than sixty five percent of the total proceeds of such fund.

C. TDS on income of units :

As per the provisions of section 194K and section 196A of the Act, where any income is credited or paid on or after 1st April 2003 by a Mutual Fund, no tax is required to be deducted at source.

D. Tax on capital gains

i) Long Term Capital Gains

Units held for more than twelve months preceding the date of their transfer are long term capital asset.

As per section 10(38) of the Act, any income arising from the transfer of a long term capital asset being a unit of an Equity Oriented Scheme chargeable to securities transaction tax (STT) shall not form part of total income, therefore, exempt from Income Tax. As per section 10(38) of the Act, equity oriented fund means a fund where the investible funds are invested by way of equity share in domestic companies to the extent of more than sixty five percent of the total proceeds of such fund and which has been set up under a scheme of a mutual fund specified under section 10(23D) of the Act.

ii) Short term capital gains

Units held for not more than twelve months preceding the date of their transfer are short term capital asset. Capital gains arising from the transfer of short term capital assets being unit of an equity oriented scheme which is chargeable to STT is liable to income tax @ 15% under section 111 A and section 115 AD of the Act. The said tax rate is increased by surcharge, if applicable.

iii) Securities Transaction Tax (STT)

As per Chapter VII of Finance (No. 2) Act, 2004 relating to Securities Transaction Tax (STT), with effect from June 01, 2006, the STT is payable by the seller at the rate of 0.25% (this rate stands reduced to 0.001% w.e.f. 1st June 2013 by the Finance Act 2013) on the sale of unit of an equity oriented scheme to the Mutual Fund. In the event of sale of units to the Mutual Fund, the STT is collected by the Mutual Fund at source.

The following are the rates of STT w.e.f. 1st June 2013:

Sl.No.

Nature of taxable securities transaction

Payable by

Rates w.e.f. 1st June 2013
(in per cent)

1.

Delivery based purchase of units of an equity oriented fund entered into in a recognized stock exchange

Purchaser

Nil

2.

Delivery based sale of units of an equity oriented fund entered into in a recognized stock exchange

Seller

0.001

3.

Non Delivery based sale of units of an equity oriented fund entered into in a recognized stock exchange

Seller

0.025%

4.

Sale of a unit of an equity oriented fund to the mutual fund

Seller

0.001

With effect from 01st April 2008:

E. TDS on Capital Gains

i) Resident Investors

As per Central Board of Direct Taxes ('CBDT') circular No.715 dated 8th August 1995, in case of resident unitholders no tax is required to be deducted from capital gains arising at the time of redemption of the units.

ii) For Non Resident Investors

  • Long-Term Capital Gains :
    No tax is deductible from the proceeds payable to non resident investors from long term capital gains arising out of redemption of units of an equity oriented fund.

  • Short-Term Capital Gains(a) Non Resident Indians:
    As per Part II of the First Schedule to the Finance (No. 2) Act 2014 {Clause 1 (b) (i) (C)}, the Mutual Fund is liable to deduct tax @ 15% on short term capital gains.

  • (b) In the case of a Company Other than a Domestic Company (foreign company, as defined under the Act):
    As per Part II of the First Schedule to the Finance (No. 2) Act 2014 {Clause 2 (b) (vii)}, the Mutual Fund is liable to deduct tax @ 15% on short term capital gains.

  • (c) Foreign Institutional Investors (FIIs) (as defined under the Act):
    In the case of Foreign Institutional Investors (FIIs), no tax would be deductible at source from the capital gains arising on redemption of units in view of section 196 D (2) of the Act.

    • Education Cess and Surcharge:
      The tax / TDS (except STT) is to be increased by applicable surcharge. Further an education cess @ 2% and secondary and higher education cess @1% is to be charged on amount of tax and surcharge.

    • UTI-Rajiv Gandhi Equity Savings Scheme (UTI-RGESS):
      The tax benefits for the UTI-RGESS are available only to resident individuals and apply with effect from the assessment year 2013-14. The provisions have been modified by from the assessment year 2014-15. Some of the provisions as per Sec 80 CCG read with the Rajiv Gandhi Equity Savings Scheme 2013 (the RGESS 2013) notified by CBDT notification no 94 dated 18th December 2013 [S.O. 3693(E)]. are as under:

      The deduction shall be allowed for three consecutive assessment years, beginning with the assessment year relevant to the previous year in which the listed units were first acquired.

      If the investor fails to fulfill any of the provision of the section 80CCG of the Act/RGESS 2013, the deduction originally allowed to him/her for any previous year shall be deemed to be income of the assessee of the previous year in which the investor fails to comply with the provisions and shall be liable to tax for the assessment year relevant to such previous year.

      Further, where the demat account is not in compliance with the conditions laid down in paragraph 7 in respect of flexible lock-in period, the deduction originally allowed to the investor under section 80CCG shall be liable to tax as specified in the provisions.

      Deduction under this section is available to a resident individual, if his gross total income for the relevant assessment year does not exceed Rs. 12 lakhs (enhanced from Rs.10 lakhs).

    • • Eligible investment to claim deduction - Deduction under this section is available, if the assessee is a new retail individual resident investor as specified in the RGESS 2013and has acquired the listed units in accordance with the RGESS 2013. The investment is to be under lock in as per the RGESS 2013.
    • • Amount of deduction – If the prescribed conditions are satisfied, a deduction will be allowed under section 80CCG. The amount of deduction is 50 per cent of amount invested in listed units. However, the amount of deduction under this section cannot be more than Rs. 25,000/-. If any deduction is claimed by a taxpayer/assessee under section 80CCG in any year, he/she shall not be entitled for any deduction under this section for any subsequent year. If the assessee, after claiming the aforesaid deduction, fails to satisfy the above conditions, the deduction originally allowed shall be deemed to be the income of the assessee of the year in which default is committed.

      The transfer /pledge /assignment of the units is not permitted during the fixed lock-in-period as per 80 CCG of the Act read with CBDT notification no. 94 dated 18th December 2013 [S.O. 3693(E)].

    As per the RGESS 2013, a new retail investor who has invested in accordance with the Rajiv Gandhi Equity Savings Scheme, 2012 (notified by the CBDT notification no. 51 dated 23rd November 2012) shall continue to be governed by the provisions of that Scheme to the extent it is not in contravention of the provisions of the RGESS 2013 and such investor shall also be eligible for the benefit of investment made in accordance with this Scheme for the financial years 2013-14 and 2014-15.

    The transfer/pledge/assignment of the RGESS units is not permitted during the fixed lock-in-period as per 80 CCG of the Act read with CBDT notification no 94 dated 18th December 2013 [S.O. 3693(E).

    ELSS Schemes:

    Contribution made by individuals and HUFs in the above Plans / Scheme will be eligible for deduction of the whole of the amount paid or deposited subject to a maximum of Rs. 1,50,000/- under Section 80 C of the Act as provided therein.

    As per the CBDT notifications for the ELSS,

    • if ninety per cent or more of the units issued under any plan / scheme are repurchased before completion of ten years, the UTI AMC may at its discretion, terminate that plan / scheme even before the stipulated period of ten years; and redeem the outstanding units at the final repurchase price to be fixed by UTIAMC.
    • units issued under the ELSS can be pledged only after three years of the issue of the units.

    Other than Equity-Oriented Funds- Tax Treatment of Investments


    Tax issues concerning Unit holders

    A. Tax on income in respect of units

    As per section 10(35) of the Act, income received by investors under the schemes of Mutual Fund is exempt from income tax in the hands of the recipient unitholders.

    B. Dividend Distribution Tax (additional income tax on distributed income):

    i) For Money Market and Liquid Schemes:

    As per section 115R of the Act, the dividend distribution tax for Money Market and Liquid Fund is
    a) 25% plus surcharge on distribution made to any person being an individual or a HUF, b) 30% plus surcharge on income distributed to any other person

    ii) For Schemes other than Money Market and Liquid Schemes:

    As per section 115R of the Act, income distribution tax shall be levied at
    a) 25%, w.e.f. 01st June 2013, plus surcharge for distribution made to individuals or HUF,b) 30% plus surcharge for distribution made to any other person.

    Provided that w.e.f. 01st June 2013, where any income is distributed by a mutual fund under an infrastructure debt fund scheme (as defined) to a non-resident (not being a company) or a foreign company, the mutual fund shall be liable to pay additional income-tax at the rate of five per cent on income so distributed.

    The rate of surcharge on income distribution tax is increased from 5% to 10% w.e.f. 01st April 2013.

    As per the Finance (No.2) Act 2014, with effect from 01st October 2014, for determining the dividend distribution tax payable, the amount of distributed income be increased to such amount as would, after reduction of the dividend distribution tax from such increased amount, be equal to the income distributed by the Mutual Fund (dividend distribution tax will be payable after grossing up).

    C. Tax on capital gains

    Long Term Capital Gains
    Units of equity oriented fund (as defined in the Act) held for more than 12 months qualify as long term capital asset. As per Finance (No.2) Act 2014, w.e.f. 10th July 2014, units of other schemes (i.e. other than equity oriented fund) will qualify as long term capital asset only if such units are held for more than 36 months.

    Resident Unitholders
    Any long term capital gain arising on redemption of units by residents is subject to treatment indicated under Section 48 and 112 of the Act. Long term capital gains in respect of units held for more than 36 months is chargeable to tax @ 20% after factoring the cost inflation index. With effect from 10th July 2014, the option of income tax @10%, without indexation, is not available.

    Non Resident Unitholders
    With effect from 01st April 2012, under section 112, long term capital gain on transfer of listed units shall be taxable @20% and 10% on unlisted units if the non-resident is not a company or a foreign company and without applying the indexation provisions.

    FIIs
    As per section 115 AD of the Act, long term capital gains on sale of units are to be taxed @ 10%. without indexation benefit. By the Finance Act (No.2) 2014, securities held by FII investor, which has invested in such securities in accordance with the regulations made under the SEBI Act 1992, will be treated as capital asset.

    ii) Short Term Capital Gains,
    W.e.f. 10th July 2014, Units held for not more than thirty six months preceeding the date of their transfer are short term capital assets. Capital gains arising from the transfer of short term capital assets will be subject to tax @30% for FIIs under section 115AD of the Act and at the normal rates of tax applicable to such assessee.

    Education Cess and Surcharge:
    The tax is to increased by applicable surcharge. Further an education cess @ 2% and secondary and higher education cess @1% is to be charged on amount of tax and surcharge

    E. TDS on capital gains
    i) Resident Investors
    As per Central Board of Direct Taxes ('CBDT') circular No.715 dated 8th August 1995, in case of resident unitholders no tax is required to be deducted from capital gains arising at the time of redemption of the units.

    ii) for Non Resident Investors
    a) Non Resident Indians:
    Long Term Capital Gains
    As per Part II of the First Schedule to the Finance (No.20 Act 2014 {Clause 1 (b) (i) (D)}, the Mutual Fund is liable to deduct tax @ 20% on long term capital gains on listed units. As per Part II of the First Schedule to the Finance (No.2) Act 2014 {Clause 1 (b) (i) (B) the Mutual Fund is liable to deduct tax @ 10% on unlisted units.

    In the case of other non-resident investors, as per Part II of the First Schedule to the Finance (No.2) Act 2014 {Clause 1(b) (ii) (H)}, for long term capital gain on transfer of unlisted securities (which includes unlisted units of the Schemes of Mutual Funds) Mutual Fund is liable to deduct tax @10%.

    Short Term Capital Gains
    As per Part II of the First Schedule to the Finance (No.2) Act 2014 {Clause 1 (b) (i) (K)}, the Mutual Fund is liable to deduct tax @ 30% on short term capital gains.

    b) Company Other than a Domestic Company:
    Long Term Capital Gains

    As per Part II of the First Schedule to the Finance (No.2) Act 2014 {Clause 2 (b) (ix)}, the Mutual Fund is liable to deduct tax @ 20% on listed units. As per Part II of the First Schedule to the Finance (No.2) Act 2014 {Clause 2 (b) (viii)}, the Mutual Fund is liable to deduct tax @ 10% on unlisted units.

    Short Term Capital Gains
    As per Part II of the First Schedule to the Finance (No.2) Act 2014 {Clause 2 (b) (x)}, the Mutual Fund is liable to deduct tax @ 40% on short term capital gains.

    (iii) FIIs:
    In the case of Foreign Institutional Investors (FIIs), no tax would be deductible at source from the capital gains arising on redemption of units in view of section 196 D (2) of the Act.

    Education Cess and Surcharge:
    The TDS is to increased by applicable surcharge. Further an education cess @ 2% and secondary and higher education cess @1% is to be charged on amount of tax and surcharge.

    Retirement Benefit Plan 1971, Unit Linked Insurance Plan of UTI Mutual Fund : Tax benefits under section 80 C Contribution made by individuals and HUFs in the above Plans / Scheme will be eligible for deduction of the whole of the amount paid or deposited subject to a maximum of Rs.1,50,000/- under Section 80 C of Income Tax Act, 1961 as provided therein.

    Certain common provisions for equity oriented funds and other than equity oreinted funds

    1. FPI:

    By virtue of CBDT Notification no. S.O.199 (E) dated 22nd January 2014, the tax provisions as applicable to FIIs will also be applicable to Foreign Portfolio Investors (FPI) [which includes Qualified Foreign Institutional Investors (QFIs)]. By SEBI Circular no. IMD/FIIC/6/2014 dated March 28, 2014, SEBI has provided that the FPI regime shall commence w.e.f. June 01, 2014. SEBI has also issued operational guidelines for Designated Depository Participants (DDPs) as per which the SEBI approved DDPs would grant registration to FPIs on behalf of SEBI and also carry out other allied activities including tax deduction/withholding in compliance under the FPI Regulations. FPIs are also advised to consult their DDPs on the taxation including TDS aspects.

    2. Surcharge, Education Cess and secondary & higher education cess:

    The tax/TDS is to increased by applicable surcharge. Further an education cess @ 2% and secondary & higher education cess @1% is to be charged on amount of tax and surcharge.

    Finance Act 2013:
    Surcharge - TDS on income of units : Changes due to Finance Act 2013
    As per the Finance Act 2013 (Part II of the First Schedule), surcharge on the amount of income-tax deducted (TDS) for non resident investors, w.e.f. 01st April 2013, is as under:

    (i) in the case of every person being a non resident (other than foreign company), shall be ten per cent of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees (there was no surcharge earlier);
    (ii) in the case of every company other than a domestic company (foreign company), shall be:
    (a) two per cent of income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees but does not exceed ten crore rupees, and
    (b) five per cent of income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds ten crore rupees.
    The TDS rates mentioned above are subject to the DTAA (Double Taxation Avoidance Agreement) provisions.

    3. Double Taxation Avoidance Agreement (DTAA) and General Anti Avoidance Rules (GAAR)

    As per CBDT Circular No. 728 dated October 30, 1995, in the case of remittance to a country with which a DTAA is in force, the tax is to be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.

    As per the Finance Act 2013:

    (i) in the case of every person being a non resident (other than foreign company), shall be ten per cent of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees (there was no surcharge earlier);
    (ii) in the case of every company other than a domestic company (foreign company), shall be:
    (a) two per cent of income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees but does not exceed ten crore rupees, and
    (b) five per cent of income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds ten crore rupees.
    The TDS rates mentioned above are subject to the DTAA (Double Taxation Avoidance Agreement) provisions.

    a) submission of Tax Residency Certificate, containing such particulars as may be prescribed, is a prerequisite but not sufficient condition for availing the benefits of the DTAA. The assessee shall also provide prescribed documents and information for claiming benefits under DTAA,

    b) the benefits of double taxation relief under Chapter IX (containing DTAA provisions) shall be subject to the provisions of General Anti Avoidance Rules (GAAR) contained in Chapter X-A of the Act. Further, the provisions of Chapter X-A shall be applied in accordance with such guidelines and subject to such conditions and the manner as may be prescribed.

    For the unitholder to obtain the benefit of a lower rate available under a DTAA, the unit holder is required to provide the Mutual Fund with a certificate obtained from his Assessing Officer stating his eligibility for the lower rate.
    The Finance Act 2013, interalia,:
    a) has omitted sub-section (2A) of section 90 of the Act applicable from 1st April 2013 as per which the provisions of Chapter X-A relating to GAAR apply to assesse, even if such provisions are not beneficial to the assessee.
    b) inserted new sub-section (2A) of section 90 of the Act applicable from 1st April 2015 as per which the provisions of Chapter X-A of the Act relating to GAAR shall apply to assesse, even if such provisions are not beneficial to the assessee.
    c) omitted the present Chapter X-A of the Act relating to GAAR w.e.f 1st April 2013 and inserted new Chapter X-A(GAAR) w.e.f. 1st April 2015.

    4. Minimum Alternate Tax (MAT):

    The provisions of MAT have been made applicable on certain companies (Chapter XII-B) and certain other persons (Chapter XII-BA) as per the provisions contained therein. Income by way of long term capital gains shall be taken into account in computing the Book Profit and income tax payable.MAT provisions are not applicable to an individual, HUF, or an AOP or body of individuals, whether incorporated or not, or an artificial juridical person referred to in section 2(31)(vii) of the Act, if the adjusted total income of such person does not exceed twenty lakh rupees.

    5. Short Term Capital Losses

    As per section 94(7), if any person acquires units within a period of 3 months prior to the record date fixed for declaration of dividend or distribution of income and sells or transfers the same within a period of 9 months from such record date, losses arising from such sale to the extent of income received or receivable on such units, which are exempt under the Act, will be ignored for the purpose of computing his income chargeable to tax.

    Further, as per Section 94(8), where additional units have been issued to any person without any payment, on the basis of existing units held by such person then the loss on sale of original units shall be ignored for the purpose of computing income chargeable to tax, if the original units were acquired within 3 months prior to the record date fixed for receipt of additional units and sold within 9 months from such record date. However, the loss so ignored shall be considered as cost of acquisition of such additional units held on the date of sale by such person.

    6. Investment by Trusts:

    Investment in units of the Mutual Fund rank as eligible form of investment under section 11(5) read with section 13 of the Act and Rule 17C(i) of the Income Tax Rules, 1962 for Public Religious & Charitable Trust.

    As per the Finance (No.2) Act 2014, w.e.f. 1st April 2014, where a trust or an institution has been granted registration for purpose of availing of exemption under Section 11, and the registration is in force for a previous year, then such trust of institution cannot claim any exemption under any provision of Section 10 [other than that relating to exemption of agricultural income and income exempt under Section 10 (23C] for that previous year. Consequently, these institutions will not be entitled to claim exemption like exemptions pertaining to dividends, long-term capital gain.

    7. Higher TDS if PAN not available:

    With effect from 01st April 2010, a new provision (section 206AA) has been inserted in the Act. As per this provision, any person entitled to receive any sum or income or amount, on which tax is deductible shall furnish his Permanent Account Number (PAN) to the person responsible for deducting such tax, failing which tax shall be deducted @ 20% or the prescribed rate, whichever is higher. Applicable surcharge, education cess and secondary & higher education cess will also be deducted on such amount of TDS.

    8. Wealth Tax

    Units of Mutual Fund are not covered under the definition of 'assets' under section 2(ea) of the Wealth Tax Act, 1957, and hence value of investment in units is completely exempt from Wealth Tax.

    9. Gift Tax

    The Gift Tax Act, 1958 has abolished the levy of Gift Tax in respect of gifts made on or after 1st October 1998. Thus, gifts of units on or after 1st October, 1998 are exempt from Gift Tax. Further, subject to certain exceptions, gifts from persons exceeding Rs.50,000/- are taxable as income in the hands of donee pursuant to section 2(24)(xv) of the Act read with section 56(2)(vii) of the Act.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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