Tax Laws governing investments in mutual funds Under Income Tax Act, 1961
I) To Unit-holders(Resident)
Section 94(6) of the Income Tax Act, 1961
Section 94(6) of the Income Tax Act 1961 now provides that any person who buys or acquires any securities or unit within a period of three months prior to the record date and such person sells or transfers such securities or unit within a period of three months after such date and the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.
Section 10(33) of the Income Tax Act, 1961
The dividend received by the investors from the scheme will be exempt from income tax for all categories of investors under Section 10(33) of the Income Tax Act, 1961. The scheme will pay a distribution tax currently @ 10% plus surcharge if the portfolio holds less than 50 percent debt securities on an average during the last one year period.
Section 88 of the Income Tax Act, 1961
Specified units of mutual fund schemes qualify for rebate under Section 88 of the Income Tax Act, 1961, subscripttion to the Units of the Scheme by Individuals and Hindu Undivided Families, not exceeding Rupees ten thousand would be eligible to a deduction, from income-tax, of an amount equal to 20% of the amount so subscribed. In the case of subscripttion by an individual, whose income is derived from the exercise of his profession as an author, playwright, artist, musician, actor or sportsman (including an athlete), the deduction admissible would be at the rate of 25%.
Tax Deducted at Source (TDS)
There will not be any Tax Deduction at Source on payment to resident unit-holders towards redemption or dividends.
Capital Gains benefit under Section 112 of the Income Tax Act, 1961
Long-term capital gains in respect of Units held for a period of more than 12 months will be chargeable under Section 112 of the Income Tax Act, 1961, at a concessional rate of tax @ 20% (excluding surcharge)
From the full value of consideration, the following amounts would be deductible to arrive at the amount of capital gains:
· Cost of acquisition as adjusted by Cost Inflation Index notified by the Central Government and
· Expenditure incurred wholly and exclusively in connection with such transfer
Investors can also opt to pay tax @ 10% (excluding surcharge) on such Long Term Capital Gains, but without the cost inflation indexation benefit.
Wealth Tax Benefits
Mutual Fund units are exempt from Wealth Tax.
a) Capital Gains under Section 112 of the Income Tax Act, 1961
Long-term capital gains in respect of Units held for a period of more than 12 months will be chargeable under Sec 112 of the Income Tax Act, 1961 at a concessional rate of tax of 20%. The capital gains would be calculated after indexation of the cost of acquisition.
Investors can also opt to pay tax @ 10% (excluding surcharge) on Long Term Capital Gains, but without the cost inflation indexation benefit.
b) Tax Deduction at Source (TDS)
Redemptions/Exchanges/Switches by non-residents/OCBs/FIIs will be subjected to tax deduction at source at the rates in force and certificates for tax deducted will be issued.
To Charitable Trusts
Investment in the units of the scheme is an eligible mode of investment under Section 11(5) of the Income Tax Act read with Income Tax Rule 17 C.
II. To the Fund
Open Ended Mutual Funds are exempt from income tax under Section 10 [23D] of the Act.