How do I get tax benefits from investing in MFs?
Income other than Capital Gains
As per the provisions of Section 10(35) of the Income Tax Act, income received in respect of the units of a mutual fund specified under Section 10(23D) of the Act is exempt from income tax in the hands of the recipient investors.
Tax Deduction at Source
No income tax is deductible at source on the income distribution by the mutual fund, as stated under the provisions of Sections 194K of the Income Tax Act, 1995.
CAPITAL GAINS
As per Section 2(42A) of the Income Tax Act, units of the scheme held as a capital asset for a period of more than 12 months immediately preceding the date of transfer, will be treated as a long-term capital asset. In all other cases, it would be treated as a short-term capital asset.Also, sub-section (7) of Section 94 of the Act provides that loss, if any, arising from the sale/transfer of units (including redemption) purchased up to 3 months prior to the record date and sold within 3 months after such date, will not be available for set off to the extent of income distribution (excluding redemptions) on such units claimed as tax exempt by the Investors.Long-term and short-term capital gains arising to resident investors from the transfer of the units of the scheme will be taxed at the following rates:
BOX Item
Short-term: Tax rate applicable as per the prescribed tax slabs
Long-term: 20% with cost inflation index benefit or 10% without cost inflation benefit, whichever is lower
Tax Deduction at Source (Capital Gains)
No TDS
No tax deducted at source from capital gains arising from repurchase or redemption of the units.
Wealth tax benefits
Under Section 2(ea) of the Wealth Tax Act, 1957, units held under MF schemes are not treated as assets, and therefore, do not attract any wealth tax.
Gift Tax
Gifts of units purchased under MF Schemes are exempt from Gift Tax as The Gift Tax Act, 1958, has ceased to apply to gifts made on or after October 1, 1998.
Religious and charitable trusts
Mutual fund investments are recognized as an eligible form of investment under Section 11(5) of the Income Tax Act read with Rule 17C of Income Tax Rules, 1962, for Religious and Charitable Trusts.
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For NRI/PIO/FII Investors:
Key tax implications applicable to Non-Resident Indians (NRI) and Persons of Indian Origin (PIO) and Foreign Institutional Investors (FII) are summarized as follows based on the relevant provisions under the Income Tax Act, 1961, Wealth Tax Act, 1957, and Gift Tax Act, 1958 (collectively referred to as ‘the relevant provisions’), subsequent to the amendments enacted by the Finance Act, 2003.
Income other than capital gains:
As per the provisions of Section 10(35) of the Income Tax Act, any income received by the investor in respect of the holding of units of a mutual fund specified under Section 10(23D) of the Act is exempt from Income Tax.
For Foreign Institutional Investors
Long-term capital gains on the sale of units would be taxed at the rate of 10% under Section 115AD of the Income Tax Act. These would be calculated without considering the indexation of the cost of acquisition. Short-term capital gains are taxed at 30%. Rates are subject to the applicable tax treaty relief, and would increase by the surcharge applicable.There is no TDS (Tax deducted at source) from capital gains (long-term or short-term) arising to an FII on repurchase/redemption of units in view of the provisions of Section 196D(2) of the Act.
Taxes on schemes for NRIs/PIOs
For an investor who is an NRI or Person of Indian Origin, following tax rates apply to your capital gains from your Mutual Fund investments:
Exemption under long-term capital gains
You can get an exemption under Section 54EC of the Income Tax Act 1961 on long-term capital gains upon transfer of units if you invest the entire capital so realized, within six months from the date of transfer, into bonds issued by National Bank of Agricultural and Rural Development (NABARD), National Highways Authority of India (NHAI) or Rural Electrification Corporation Limited (RECL), which are redeemable after three years.
The long-term capital gains upon transfer of units would be exempt from tax under Section 54ED of the Income Tax Act if the entire capital gains so realized, are invested within six months from the date of transfer, into public issue of equity shares of a company formed and registered in India. However, if the amount thus invested is less than the total capital gains realized, the exemption would apply proportionally to the invested amount. If you transfer or sell these shares within one year of investment, the amount exempted from tax would become taxable.
W.e.f. April 1, 2001, the losses arising from the sale of securities or units (in respect of which dividend or income on such securities or units is exempt from tax) would be disallowed under Section 94(7) of the Income Tax, 1961, if such securities or units have been purchased up to 3 months prior to the record date and have been sold within 3 months after such date. The amount of loss to be disallowed will be restricted to the amount of dividend or income on such securities or units claimed as tax exempt by the taxpayer.
