NISM_VA_Ch_08_Taxation

NISM VA Taxation July 13, 2022 Day – 6

Objectives By the end of the session you will be able to: • Understand the applicability of taxes in respect of mutual funds. • Get clear idea on Capital Gains and Dividend Income. • Know the difference between dividend distribution tax and capital gains tax. • Understand the Setting off Gains and Losses under Income Tax Act. • Know the Securities Transaction Tax, Tax benefits and Tax Deducted at Source.

Applicability of Taxes in respect of Mutual Funds 01 Why Does Tax Rate Vary: Income from 03 investment in 02 02 mutual fund units 03 Income earned by 01 Types Types mutual fund of of schemes Types of Mutual Fund Investor Income earned by Schemes the investor from Income investment in mutual fund units

Capital Gains Tax • Capital Gain is the difference between sale price and acquisition cost of the investment. • Since mutual funds are exempt from tax, the schemes do not pay any tax on the capital gains they earn. • Investors in mutual fund schemes however need to pay tax on their capital gains as follows: Equity-oriented funds Non-equity-oriented funds Short term capital gains 15 percent Marginal tax rate, as Long term capital gains applicable for the investor 10 percent 20% with indexation benefits

Dividend Income In February 2020, the situation changed. The Dividend income from dividend distribution tax mutual funds used to be has been done away. tax-free in the hands of the 5 investor. Henceforth, the dividends would be taxable in the hands of the recipient at the applicable tax rate.

Stamp Duty on Mutual Funds 02 01 03 Stamp duty @ 0.005% of Stamp duty will be applicable to Units will be allotted for the investment amount the amount available shall be applicable at the all transactions pertaining to time of issue of units for post deduction of stamp both physical and demat scheme inflows: duty. units. • Purchase • Additional Purchase • Dividend reinvestment • Systematic Investment Plan (SIP) • Systematic Transfer Plan (STP) • Income distribution cum capital withdrawal (Dividend) Transfer Plan (DTP).

Few Key Provisions for Setting off of Capital Gains Capital loss, short term or long term, cannot be set off against any other head of income (e.g., 01 salaries). Long term capital loss can 03 02 only be set off against long term capital gain. Short term capital loss is to be set off against short term capital gain or long-term capital gain. 7

Securities Transaction Tax • STT is applicable only on redemption/switch to other schemes/sale of units of equity oriented mutual funds whether sold on stock exchange or otherwise. • STT is not applicable on purchase of units of an equity scheme. It is also not applicable to transactions in debt securities or debt mutual fund schemes. TRANSACTION RATES PAYABLEBY Purchase of units Nil Purchaser Sale of units 0.001% Seller Sale of Equity shares, units of business trust, units 0.025% Seller (non-delivery based) 0.001% Seller Sale of units to the mutual fund 8

Bonus Stripping The practice of buying stocks or mutual fund units to take part in a bonus issue, which allows them to book losses on the original investment value and then set it off is called Bonus stripping. Particulars Rate Investor Purchase Scheme Rs. 28 Bonus issue declared 1:1 NAV of Scheme Rs. 14 Investors sells original unit Rs. 14 Loss incurred Rs. 15 (Rs. 28 – Rs. 14) This capital loss is not available for setting off against capital gains, if the original units were bought within a period of 3 months prior to the record date for the bonus issue and sold off within a period of 9 months after the record date (as per the rule of bonus stripping). In such cases, the capital loss will be treated as the cost of acquisition of the bonus units. 9

Tax Benefit U/S 80C ELSS (Equity Linked Savings Scheme) Tax benefit is available to first holder in case of eligible for deduction joint holding Benefit available upto Rs. 1.50 lacs per year Dividend in dividend TAX reinvestment plan also BENEFIT per investor locked-in for 3 years 10 Locked-in for 3 years, including each of the SIP investment

Tax Deducted at Source No TDS for TDS of 10% on TDS applicable Resident dividend for non-resident investors. amount, if it investors is exceeds Rs. lower of tax in India and the 5,000. tax specified in DTAA of the resident’s country. 11

Application of GST GST on fees paid on investment management and advisory fees The commission payable to the shall be charged to the scheme distributors of mutual funds may in addition to the overall limits be subject to GST, as applicable in case of the ARN holder. Such specified as per the Total Expense Ratio (TER) provisions. tax cannot be charged to the scheme. GST on all the fees other than investment and advisory fees GST on brokerage and shall be charged to the scheme transaction cost paid for within the maximum limit of TER. execution of trade, if any, shall be within the limit of TER. GST on exit load, if any, shall be deducted from the exit load and the net amount shall be credited to the scheme.

Summary: • As a mutual fund is a pass-through vehicle, we must consider the income at two levels– income earned by the fund, and income earned by the investor for tax purpose. • The tax structure is different for different types of investors, as well as for different categories of funds, too. • Capital gains tax is classified depending on the period of holding and the type of funds invested in. • AMC(s) can charge GST, as per applicable Taxation Laws, to the schemes within the limits prescribed under SEBI (Mutual Fund) Regulations.

Thank you