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  • Tax Issues regarding Mutual Fund
  • Tax Issues as to Unit Holders- A
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All About Tax All About Tax

Please note: The disclosures in respect of tax benefits to the Mutual Fund and the unit holders is in accordance with the Tax Laws/Finance Act 2010 as on 30/11/2010. The information stated below, in the 'UTI Tax Reckoner' and 'Calculate your Tax' is based on UTI Mutual Fund's understanding of the tax laws and only for the purpose of providing general information to the investors of the Mutual Fund Schemes. In the case of any investment, there can 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 benefits mentioned herein and in the 'UTI Tax Reckoner' and 'Calculate your Tax' are mere expressions of opinion 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 secondary market operations. 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 his or her own tax consultant with respect to the specific tax implications arising out of his or her participation in the schemes.

UTI Mutual Fund is registered with SEBI and as such, is eligible for benefits under Section 10 (23D) of the Income Tax Act, 1961 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.

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.

For Equity-Oriented Funds- Tax Treatment of Investments

A. Income Tax (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, "an equity-oriented fund means such a 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 a 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

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. It is 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 Income Tax Act, 1961.

ii) Short-Term Capital Gains

Units held for not more than twelve months' preceding the date of their transfer are 'short-term capital assets'. A capital gain 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 at 15% under Section 111A and Section 115AD 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% on the sale of unit of an equity-oriented scheme to the mutual fund. The STT is collected by the mutual fund at source.

With effect from 1st April 2008:

  • the deduction under Section 88E of the Act has been discontinued, and

  • the amount of STT paid by the assessee during the year in respect of taxable securities transactions entered into in the course of business will be allowed as deduction under Section 36 of the Act subject to the condition that such income from taxable securities transactions is included in the income computed under the head "Profits and Gains of business or profession".

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 unit holders, no tax is required to be deducted from capital gains arising at the time of redemption of the units.

ii) 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
    s As per Part II of the First Schedule to the Finance Bill 2010 {Clause 1 (b) (i) (C)}, the mutual fund is liable to deduct tax at 15% on short-term capital gains. The TDS is to be increased by applicable surcharge.

iii) Companies

Other than a Domestic Company (foreign company, as defined under the Act):

  • Long-Term Capital Gains
    No tax is to be deducted 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
    As per Part II of the First Schedule to the Finance Bill 2010 {Clause 2 (b) (vii)}, the mutual fund is liable to deduct tax at 15% on short-term capital gains. The TDS will have to be increased by applicable surcharge.

iv) 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 at 2% and Secondary and Higher Education Cess at 1% is to be charged on an amount of tax and surcharge.

  • Retirement Benefit Plan, Unit Linked Insurance Plan, Equity Linked Savings Scheme
    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.1,00,000/- under Section 80 C of Income Tax Act, 1961 as provided therein.

Other than Equity-Oriented Funds- Tax Treatment of Investments

A. Income Tax (in respect of units)

As per Section 10(35) of the Act, income received by investors under the schemes of a mutual fund is exempt from income tax in the hands of the recipient unit holders.

B. Dividend Distribution Tax

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 25% plus surcharge.

ii) For Schemes other than Money Market and Liquid Schemes

As per Section 115R of the Act, income distribution tax shall be levied at 12.5% plus surcharge for distribution made to individuals or HUF and for any other person at 20% plus surcharge.

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

  • Resident Unit Holders
    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 12 months is chargeable to tax at 20% after factoring the cost inflation index or tax at the rate of 10% without indexation, whichever is lower. The said tax rate is to be increased by surcharge, if applicable.

  • Non-Resident Unit Holders
    Under Section 115 E of the Act, in case of the income of non-resident Indians by way of long-term capital gains, in respect of units is chargeable at the rate of 20% plus surcharge, if applicable. Chapter XIIA exclusively deals with taxation related to non-resident Indians. Under Section 115 D of the Income Tax Act, a non-resident Indian cannot avail the benefit of indexation.

    In the alternative, the capital gains tax may be computed by the non-residents under section 112, if it is more beneficial to them. Under Section 112 of the Act, long-term capital gains are taxed at the rate of tax at 20% plus surcharge. The benefit of indexation is also available to the non residents under section 48 of the Income Tax Act, 1961. Gains on short term capital asset are taxed as regular income.

  • FII's
    As per Section 115 AD of the Act, long-term capital gains on sale of units are to be taxed at 10% and short-term gains are to be taxed at 30%. Such gains in either case would be calculated without indexation benefit as the first and second provisos to section 48 do not apply to FII's by virtue of Section 115 AD (3) of the Act. The applicable tax rates are to be increased by applicable surcharge.

ii) Short-Term Capital Gains

Units held for not more than twelve months preceding 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 at the normal rates of tax applicable to such an assessee.

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 unit holders no tax is required to be deducted from capital gains arising at the time of redemption of the units.

ii) Non-Resident Investors

  • Long-Term Capital Gains
    As per Part II of the First Schedule to the Finance Bill 2010 {Clause 1 (b) (i) (D)}, the mutual fund is liable to deduct tax at 20% on long-term capital gains.

  • Short-Term Capital Gains
    As per Part II of the First Schedule to the Finance Bill 2010 {Clause 1 (b) (i) (K)}, the mutual fund is liable to deduct tax at 30% on short-term capital gains.

    Further an Education Cess at 2% and Secondary and Higher Education Cess at 1% is to be charged on amount of tax and surcharge mentioned above.

iii) Companies

Other than a Domestic Company (foreign company, as defined under the Act):

  • Long-Term Capital Gains
    As per Part II of the First Schedule to the Finance Bill 2010 {Clause 2 (b) (viii)}, the mutual fund is liable to deduct tax at 20% on long-term capital gains.

  • Short-Term Capital Gains
    As per Part II of the First Schedule to the Finance Bill 2010 {Clause 2 (b) (ix)}, the mutual fund is liable to deduct tax at 40% on short-term capital gains.

iv) FII's:

In the case of Foreign Institutional Investors (FII's), 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 be increased by applicable surcharge. Further an education cess at 2% and Secondary and Higher Education Cess at 1% is to be charged on amount of tax and surcharge.

Some common provisions for equity-oriented and other funds:

1. Double Taxation Avoidance Agreement (DTAA)

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. For the unit holder 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.

2. 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 a 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.

3. Investment by Trusts

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

4. Higher TDS on Unavailability of PAN

With effect from 1st 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 at 20% or the prescribed rate, whichever is higher. Applicable surcharge, Education Cess and Secondary and Higher Education Cess will also be deducted on such amount of TDS.

5. Wealth Tax

Units of mutual fund are not covered under the definition of 'assets' under Section 2(ea) of the Wealth Tax Act, 1957. Hence, value of investment in units is completely exempt from Wealth Tax.

6. 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)(xiv) of the Act read with Section 56(2)(vi) of the Act.

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

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