June 2013

Increase in Dividend Distribution Tax from June 01 2013 in Debt Mutual Funds – Impact

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In the FY14 Budget the Finance Minister has proposed to increase the Dividend Distribution Tax (DDT) on Debt Mutual Funds (other than liquid and money market funds on which the DDT was already 25%) from 12.5% to 25% (plus surcharge and cess) for individuals and HUFs. The hike is proposed to provide uniform taxation for all types of funds other than equity oriented mutual funds in the Mutual Fund Industry.
This amendment will take effect from 1st June, 2013.

Classification of Funds: As far as tax implications on Indian mutual funds are concerned, they are classified as three parts as ‘Equity oriented Funds’, ‘Liquid and money market Funds’ and ‘Debt Funds other than Liquid Funds’.

In ‘Equity Oriented Funds’, the categories coming under are Equity Diversified, Equity Sector, Hybrid – Equity Oriented (more than 65% equity) and Arbitrage Funds.

Liquid Funds and Liquid ETF are coming under ‘Liquid Funds’ while Ultra Short Term Funds, Floating Rate Funds, Short Term Income, Dynamic Income, Income Funds, Gilt Funds, Fund of Funds, Hybrid – Debt Oriented (less than 65% equity), MIP, FMPs are coming under ‘Debt Funds other than Liquid Funds’.,

Summary of Changes proposed :

Classification of Debt funds , Short term taxation , dividend distribution tax DDT, Effective yield


Tax on distributed income:Given the tax provision on the distributed income, fund houses pay taxes on the dividend distributed to the investors. Fund houses deduct DDT from the Dividend. So the dividends are tax free in the hands of investors.
Existing tax structure on DDT:As per the existing structure, there is no tax levied on the dividend distributed by Equity oriented mutual fund schemes for any investors. But, Liquid and money market Funds are liable to pay the DDT of 25% (plus surcharge and cess) for retail investors while the funds other than Liquid and money market funds are liable to pay DDT of 12.5% (plus surcharge and cess).

For institutions and corporates, DDT on Equity funds is nil while 30% (plus surcharge and cess) in case of the dividends from the investments in Liquid Funds and debt funds other than Liquid funds.

Proposed Structure: From June 01, 2013 onwards, retail investors who invest in all debt funds (other than equity funds) are liable to pay DDT of 25% (plus surcharge and cess) on the dividend income. The DDT for corporate investors has been kept unchanged at 30% (plus surcharge and cess).
Increase in Surcharge: Further, the surcharge on Dividend Distribution Tax for all mutual fund schemes has gone up from 5% to 10%.
Impact: This move will make dividend options in Debt Mutual Funds unattractive for retail investors. Because the net post tax return in the hands of the investors from dividend plans would be lower as the DDT charged on the debt funds has been increased from 12.5% to 25% (plus surcharge and cess). Meanwhile, the Growth options in the Debt Mutual Funds will become attractive for retail investors who redeem the investments after a year, taking advantage of long term capital gains.

Capital Gain: Since the DDT is applicable for Dividend plans, Capital Gains tax is applicable to Growth plans. The gains from the debt mutual scheme (growth option) are taxed depending on the period the investments in the mutual funds are kept. If the debt mutual fund units are redeemed after a year, then the gains thereon are liable to Long Term Capital Gain tax while the proceeds from the investments which redeemed before one year are taxed as Short Term Capital Gain. For long term capital gains in debt funds, the investor has to pay the tax @ lesser of 10% without indexation or 20% with indexation; (plus education cess). Short Term Capital Gain is taxed as per the normal slab of the investors. (more…)

December 2012

Taxation (2012-2013) on Mutual Fund Schemes ~ Snapshot

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The Tax Maze never ceases to amaze. There are various options available to investors in equity, debt etc. And each type of investment is taxed differently according to the residential status, period of holding, type of investment & tax bracket.

Here is a snapshot of the taxation (2012-2013) on Mutual Fund Schemes in India. This if of help in understanding the tax implications and judiciously allocating funds across assets.

Dividend
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes Tax Free Tax Free Tax Free
Other than Equity Oriented Schemes Tax Free Tax Free Tax Free

 

Dividend Distribution Tax (Payable by the Scheme)
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes* Nil Nil Nil
Other than Equity Oriented Schemes 12.5%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 12.5%+ 5% Surcharge+ 3% Cess
13.519% 32.445% 13.519%
Money Market & Liquid Schemes 25%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 25%+ 5% Surcharge+ 3% Cess
27.0375% 32.445% 27.0375%

 

Long Term Capital Gains (Units held for more than 12 months)
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes* Nil Nil Nil
Other than Equity Oriented Schemes 12.5%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 12.5%+ 5% Surcharge+ 3% Cess
13.519% 32.445% 13.519%
Money Market & Liquid Schemes 25%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 25%+ 5% Surcharge+ 3% Cess
27.0375% 32.445% 27.0375%

 

Short Term Capital Gains (Units held for 12 months or less)
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes* 15% + 3% Cess 15% +5% Surcharge # + 3% Cess 15% + 3% Cess
15.45% 16.223% 15.45%
Other than Equity Oriented Schemes 30%^ + 3% Cess 30% +5% Surcharge # + 3% Cess 30%^ + 3% Cess
30.9% 32.445% 30.9%

^Assuming the investor falls into the highest tax bracket
# The total income of the corporate would exceed Rs. 1 Crore

Tax deducted at source pertaining to NRI Investors$
Short Term Capital Gain Long Term Capital Gain
Equity Oriented Schemes 15.450% ## Nil
Other than Equity Oriented schemes (Listed) 30.90% 20.60%@
Other than Equity Oriented schemes (Unlisted) 30.90% 10.30%

*STT @ 0.25% will be deducted on equity oriented schemes at the time of redemption and switch to the other schemes.
Mutual Fund would also pay securities transaction tax wherever applicable on the securities bought/sold
** The tax rates are subject to DTAA benefits available to NRI’s. As per the Finance Act, 2012, submission of tax residency certificate containing prescribed particulars, will be a necessary (though not sufficient) condition for granting DTAA benefits to non-residents
*** These are the tax rates applicable to capital gains, in case the rate of tax is lower than 20% and if the NRI does not have a Permanent Account Number, then for the purpose of TDS, the withholding tax rate would be 20%
## Subject to NRI’s having Permanent Account Number in India
$ As per the Finance Act 2012, with effect from July 1, 2012, a list of transactions is proposed to be specified, wherein the rate for tax deduction at source needs to be determined by the assessing officer. In case the transaction of sale of mutual fund units by an NRI gets covered within such list, then an application would be required to be made to the assessing officer to determine the tax deduction at source rate
$$ As per the Finance Act, 2012, in case of transfer of unlisted securities by non-resident, the tax rates in case of long term capital gains shall be 10% (plus surcharge and cess) without indexation
@ after providing for indexation

The information  is for general purposes only. Please consult your financial advisor before making any investment decisions.