<p>Retail investors’ appetite for mutual funds has been going up in recent times with the increase in number of folios both in lump sum and SIPs. Thanks to the Sensex giving over 20% return this calendar year, the AUM of the mutual fund industry has crossed Rs 16 lakh crore for the first time and retail investors have been coming back to the markets.<br />With increase in retail participation in MFs, it is better if you as retail investors, are aware of all tax aspects with respect to investment in MFs.<br /><br />*Securities Transaction Tax (STT): STT is a tax that an investor has to pay on the value of investments in equity shares, derivatives and units of equity mutual funds. <br />An investor has to pay STT of 0.0010% on the total value when he redeems (sells) units of equity mutual funds. So, if an investor redeems units of equity mutual funds worth Rs 1 lakh, he pays Re 1 as STT. In other words, STT is not applicable on purchase and redemption of units of debt mutual funds and on purchase of quity mutual funds.<br /><br />*Dividend Distribution Tax (DDT): While the MF house does not pay DDT in respect of dividends, it pays to unit holders in equity MF schemes, it has to pay DDT of 28.84% (25% plus 12% surcharge plus 3% Education Cess) on the dividends to retail investors (Both resident and non-resident) in debt MF schemes. <br /><br />Dividends are not taxed in the hands of retail investors whether it is equity or debt funds. However, do remember that this DDT is paid out of the NAV and you receive dividends net of DDT. The NAV under the dividend option will decline to the extent of gross dividend after the record date. For investors who don’t depend on dividends from time to time, it is better to opt for growth option. <br /><br />*Capital Gains Tax: Whenever an individual buys and sells (or transfers) any financial or physical asset, the transaction may result in Capital Gains (or Loss), which is the difference between purchase price and selling price. Capital gains in layman’s language can be understood as profit. Should any tax be paid on the gains he makes in these investments? <br /><br />This depends on the period of holding of investment. Based on this period, the gains may be either short-term or long-term capital gains.<br /><br />As far as mutual funds are concerned, the definition of short-term and long-term capital gains will vary from equity funds to debt funds (or non-equity) investment. Capital gains will arise due to appreciation in NAV (Net Asset Value).<br /><br />*Capital Gains Tax on Equity Mutual Funds: Short-term capital gains/loss will occur when the period of holding is less than 12 months in equity and equity mutual funds. An investor has to pay 15% tax on the gains/profit he makes in case of short-term gains. An equity fund is one which invests a minimum of 65% of its average AUM in equity. So, diversified funds, ELSS, thematic funds, arbitrage funds and balanced funds are some of the examples of equity funds. If an investor holds the investment for more than 12 months in equity funds, the investment will result in long-term capital gains. And the tax on Long-term capital gains (LTCG) is nil. While the returns in equity mutual funds are not guaranteed and are subject to market risks, there is no tax on dividends and LTCG.<br /><br />*Capital Gains Tax on Debt Funds: In case of debt funds, Short-Term Capital Gains (STCG) will arise when the period of holding is less than 36 months. <br />The investor has to pay STCG as per I-T slabs (10% or 20% or 30%) since the gains get added to his income. Liquid funds, income funds, MIP, international funds and fund of funds are some of the funds which qualify as debt funds. Investment held for more than 36 months result in long-term capital gains. <br /><br />On long-term capital gains, an individual has to pay tax of 20% with indexation benefits. Indexation is the method by which the purchase price is adjusted for inflation (through Cost Inflation Index), and the new purchase price is called as Indexed Cost of Acquisition (ICA). What this does is reduce the absolute gain, as the purchase price goes up thereby reducing the capital gain.<br /><br />*Tax benefits under Sec 80 C: An investor who invests in Equity Linked Savings Scheme can claim deduction under Sec 80C from his total income up to a maximum amount of Rs 1.50 lakh in a financial year. However, his investment is locked for three years.<br /> Tax benefits under Rajiv Gandhi Equity Savings scheme (RGESS) under Sec 80CCG: An investor can also claim tax benefits upfront if he invests in RGESS schemes Under Sec 80CCG. This is over and above the deduction under Sec 80C. There are two conditions that you have to fulfil. <br /><br />One is, you must be a first-time retail investor either in the cash or derivatives segment. Second is, your gross income should be less than Rs 12 lakh in the financial year. You can claim deduction of 50% of your investment subject to a maximum investment of Rs 50,000.<br /><br />(<em>The writer is a former banker. He currently teaches at Manipal Academy of Banking, Bengaluru</em>)</p>
<p>Retail investors’ appetite for mutual funds has been going up in recent times with the increase in number of folios both in lump sum and SIPs. Thanks to the Sensex giving over 20% return this calendar year, the AUM of the mutual fund industry has crossed Rs 16 lakh crore for the first time and retail investors have been coming back to the markets.<br />With increase in retail participation in MFs, it is better if you as retail investors, are aware of all tax aspects with respect to investment in MFs.<br /><br />*Securities Transaction Tax (STT): STT is a tax that an investor has to pay on the value of investments in equity shares, derivatives and units of equity mutual funds. <br />An investor has to pay STT of 0.0010% on the total value when he redeems (sells) units of equity mutual funds. So, if an investor redeems units of equity mutual funds worth Rs 1 lakh, he pays Re 1 as STT. In other words, STT is not applicable on purchase and redemption of units of debt mutual funds and on purchase of quity mutual funds.<br /><br />*Dividend Distribution Tax (DDT): While the MF house does not pay DDT in respect of dividends, it pays to unit holders in equity MF schemes, it has to pay DDT of 28.84% (25% plus 12% surcharge plus 3% Education Cess) on the dividends to retail investors (Both resident and non-resident) in debt MF schemes. <br /><br />Dividends are not taxed in the hands of retail investors whether it is equity or debt funds. However, do remember that this DDT is paid out of the NAV and you receive dividends net of DDT. The NAV under the dividend option will decline to the extent of gross dividend after the record date. For investors who don’t depend on dividends from time to time, it is better to opt for growth option. <br /><br />*Capital Gains Tax: Whenever an individual buys and sells (or transfers) any financial or physical asset, the transaction may result in Capital Gains (or Loss), which is the difference between purchase price and selling price. Capital gains in layman’s language can be understood as profit. Should any tax be paid on the gains he makes in these investments? <br /><br />This depends on the period of holding of investment. Based on this period, the gains may be either short-term or long-term capital gains.<br /><br />As far as mutual funds are concerned, the definition of short-term and long-term capital gains will vary from equity funds to debt funds (or non-equity) investment. Capital gains will arise due to appreciation in NAV (Net Asset Value).<br /><br />*Capital Gains Tax on Equity Mutual Funds: Short-term capital gains/loss will occur when the period of holding is less than 12 months in equity and equity mutual funds. An investor has to pay 15% tax on the gains/profit he makes in case of short-term gains. An equity fund is one which invests a minimum of 65% of its average AUM in equity. So, diversified funds, ELSS, thematic funds, arbitrage funds and balanced funds are some of the examples of equity funds. If an investor holds the investment for more than 12 months in equity funds, the investment will result in long-term capital gains. And the tax on Long-term capital gains (LTCG) is nil. While the returns in equity mutual funds are not guaranteed and are subject to market risks, there is no tax on dividends and LTCG.<br /><br />*Capital Gains Tax on Debt Funds: In case of debt funds, Short-Term Capital Gains (STCG) will arise when the period of holding is less than 36 months. <br />The investor has to pay STCG as per I-T slabs (10% or 20% or 30%) since the gains get added to his income. Liquid funds, income funds, MIP, international funds and fund of funds are some of the funds which qualify as debt funds. Investment held for more than 36 months result in long-term capital gains. <br /><br />On long-term capital gains, an individual has to pay tax of 20% with indexation benefits. Indexation is the method by which the purchase price is adjusted for inflation (through Cost Inflation Index), and the new purchase price is called as Indexed Cost of Acquisition (ICA). What this does is reduce the absolute gain, as the purchase price goes up thereby reducing the capital gain.<br /><br />*Tax benefits under Sec 80 C: An investor who invests in Equity Linked Savings Scheme can claim deduction under Sec 80C from his total income up to a maximum amount of Rs 1.50 lakh in a financial year. However, his investment is locked for three years.<br /> Tax benefits under Rajiv Gandhi Equity Savings scheme (RGESS) under Sec 80CCG: An investor can also claim tax benefits upfront if he invests in RGESS schemes Under Sec 80CCG. This is over and above the deduction under Sec 80C. There are two conditions that you have to fulfil. <br /><br />One is, you must be a first-time retail investor either in the cash or derivatives segment. Second is, your gross income should be less than Rs 12 lakh in the financial year. You can claim deduction of 50% of your investment subject to a maximum investment of Rs 50,000.<br /><br />(<em>The writer is a former banker. He currently teaches at Manipal Academy of Banking, Bengaluru</em>)</p>
