What is the Tax Treatment on Mutual Funds for resident individuals and NRIs?

Priyank
Jun 14, 2019
I am looking for tax treatment for MF gains across asset classes for resident Indians and NRIs.
1 Answer
Jun 14, 2019

Tax treatment depends on three parameters:

1.       Type of Asset (Equity or Debt)

2.      Investor category (Individual, HUF, NRI or domestic company)

3.      Investment duration (Long term or short term)


Also, only the amount invested in ELSS mutual funds can be claimed as rebate under Sec 80C. However, the gains of all mutual funds are taxable, either in LTCG or STCG, which has been explained further below.

There are two forms of taxes that are applied Mutual Funds (both equity and non-equity) gains in India - Long Term Capital Gains (LTCG) Tax and Short Term Capital Gains (STCG) Tax.

 

Equity or Equity-oriented Mutual Funds:

1.       STCG (Equity) - If any stock or equity-oriented mutual fund (more than 65% equity portfolio) is sold before 12 months of purchase, 15% tax would be applicable on the gains.

2.      LTCG (Equity) - If held for more than 12 months, gains up to Rs 100,000 are exempt from Income tax. All gains above this limit are taxed at 10%.

The same taxation is applicable across individuals, HUFs, domestic companies and NRIs.

Let me explain with an example:

  • Rahul purchased equity / equity mutual funds worth INR 10 Lakhs (100,000 units at INR 10 each) on 1-Feb-2018.
  • He sold 50,000 units for INR 15 each on 1-Oct-2018 and remaining 50,000 units for INR 16 each on 1-Mar-2019.

 

  • STCG (equity MF held < 1 year) = Total units x Profit = 50,000 x (15-10) = INR 2,50,000
    • STCG tax payable (FY 2018-19) = 15% of 2.50 Lakhs = INR 37,500
    • Net Gain (post tax) = INR (2,50,000 – 37,500) = INR 2,12,500

 

  • LTCG (equity MF held >= 1 year) = Total units x Profit = 50,000 x (16-10) = INR 3,00,000
    • LTCG tax rebate = INR 1,00,000 (every FY)
    • LTCG Taxable (FY 2018-19) = INR 3,00,000 – 1,00,000 = INR 2,00,000
    • LTCG Tax Payable (FY 2018-19) = 10% of INR 2 Lakhs = INR 20,000
    • Net Gain (post tax) = INR (3,00,000 – 20,000) = INR 2,80,000

 

  • This also shows the benefit of holding for a longer term, as the taxation happens to be much lower there.


Debt or Debt-Oriented Mutual Funds / Other than Equity Oriented Schemes:

1.       STCG (Debt) - If any debt instrument or debt-oriented mutual fund is sold before 36 months of purchase, the returns or short-term capital gains are added to your income and taxed according the income tax slab (0%, 5%, 20% or 30%). applicable to the investor.



2.      LTCG (Debt) - If held for more than 36 months, all gains are treated as long-term capital gains and taxed at 20% with indexation benefit. Indexation help you to inflate your purchase cost with cost of inflation index and bring down your tax liability.


It is applicable to individuals, HUFs and domestic companies. For NRIs, STCG is same. LTCG for NRIs is 20% with indexation for listed entities and 10% without indexation for unlisted entities.


Dividend Distribution Tax (DDT):

1.       Equity Oriented Schemes11.65% (10% + 12% surcharge + 4% cess)

2.      Money Market & Liquid Schemes:

    a.      Individuals, HUFs & NRIs: 29.12% (25% + 12% surcharge + 4% cess)

    b.      Domestic Company: 34.94% (30% + 12% surcharge + 4% cess)

3.      Debt Schemes (excluding Infrastructure Debt Fund):

    a.      Individuals, HUFs & NRIs: 29.12% (25% + 12% surcharge + 4% cess)

    b.      Domestic Company: 34.94% (30% + 12% surcharge + 4% cess)

4.      Infrastructure Debt Fund:

    a.      Individuals / HUFs: 29.12% (25% + 12% surcharge + 4% cess)

    b.      Domestic Company: 34.94% (30% + 12% surcharge + 4% cess)

    c.       NRIs: 5.82% (5% + 12% surcharge + 4% cess)


For people considering that Dividends help generate income, they should also realize that the NAV of the fund is reduced by the extent of 11.65% for every 10% dividend paid. This can lead to higher erosion than what you actually earn if held in growth funds.

Instead, suggest people to do SWP for regular income instead of dividend option due to the dividend distribution tax.

 

TDS for NRIs:

1.       STCG:

    • TDS on STCG is 15% for equity oriented funds and
    • Deducted according the income tax slab (0%, 5%, 20% or 30%) for debt oriented funds.

2.      LTCG

    • TDS on LTCG is 10% for equity oriented funds.
    • TDS on LTCG is 20% with indexation for listed schemes and 10% without indexation for unlisted schemes.

 

Also sharing an image below with tables for easy reference. Hope it helps. Please let me know for any queries.


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