FAQs on Taxation - Mutual Funds - FYI

FAQs on Taxation - Mutual Funds

What tax benefits are available to those who invest in mutual funds?

Dividends declared by debt-oriented mutual funds (i.e. mutual funds with less than 65% of assets in equities), are tax-free in the hands of the investor. However, a dividend distribution tax (which varies for individual and corporate investors) is to be paid by the mutual fund on the dividends declared. Dividends declared by equity-oriented funds (i.e. mutual funds with more than 65% of assets in equities) are tax-free in the hands of investor. There is also no dividend distribution tax applicable on these funds. Diversified equity funds, sector funds, balanced funds (with more than 65% of net assets in equities) are examples of equity-oriented funds.

Taxation of dividends of mutual fund schemes

Category	Tax rates for
	Individuals	Corporates
Liquid funds	25.75%	28.32%
Other debt funds	12.87%	22.66%
Equity funds	Nil	Nil

(Surcharge rate and cess have been factored in.)

The amount invested in tax-saving funds (ELSS) is eligible for deduction under Section 80C, however the aggregate amount deductible under the said section cannot exceed Rs 100,000 (in a financial year).

Taxation of Dividends earned on Debt Funds

Taxation of Capital Gains earned on Debt Funds

How are equity-oriented funds defined?

A mutual fund must have at least 65% of its net assets in equities/stocks to qualify as an equity-oriented mutual fund.

Do global equities qualify as equities while defining equity-oriented funds?

No, global equities do not qualify as equities while defining equity-oriented funds. Only investment in Indian equities qualify for this purpose. In other words, if an equity fund invests 100% of its net assets in global equities it will qualify as a debt fund according to the Indian Income Tax laws.

Do equity/balanced funds have to maintain a daily, minimum 65% equity allocation?

Not really, the equity allocation is calculated based on the weekly average net assets in equities. If this average is below 65%, the fund stands to forfeit its equity-oriented status.

Do balanced funds qualify as equity-oriented funds?

If balanced funds maintain a minimum (average) 65% equity allocation, they do qualify as equity-oriented funds.

Is a capital gain on sale/transfer of units of mutual fund liable to tax? If yes, at what rate?

Section 2(42A):  Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-term capital asset if the same is held for less than 12 months. The units held for more than twelve months are treated as long-term capital asset.

Section 10(38):  Under Section 10(38) of the Act, long-term capital gains arising from transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities transaction tax is paid to the appropriate authority. This makes long-term capital gains on equity-oriented funds exempt from tax from assessment year 2005-06.

Short-term capital gains on equity-oriented funds are chargeable to tax @15% (plus education cess). However, such securities transaction tax will be allowed as rebate under Section 88E of the Act, if the transaction constitutes business income.

Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket applicable (marginal tax rate) to the investor.

Long-term capital gains on debt-oriented funds are subject to tax @20% of capital gains after allowing indexation benefit, or at 10% flat without indexation benefit, whichever is less.

Section 112:  Under Section 112 of the Act, capital gains, not covered by the exemption under Section 10(38), chargeable on transfer of long-term capital assets are subject to following rates of tax:

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  Resident Individual, HUF & Partnership Firms - 20% plus education cess.
  
  
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  Indian Companies - 20% (plus surcharge if applicable and education cess).
  
  
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  Foreign Companies - 20% (plus surcharge if applicable and education cess).

Capital gains will be computed after taking into account the cost of acquisition as adjusted by Cost Inflation Index, notified by the Central Government.

"Units" are included in the proviso to the sub-section (1) to Section 112 of the Act and hence, unit holders can opt for being taxed at 10% (plus surcharge if applicable and education cess) without the cost inflation index benefit or 20% (plus surcharge if applicable and education cess) with the cost inflation index benefit, whichever is beneficial.

Under Section 115AB of the Income Tax Act, 1961, long-term capital gains in respect of units, purchased in foreign currency by an overseas financial, held for a period of more than 12 months, will be chargeable at the rate of 10%. Such gains will be calculated without indexation of cost of acquisition. No surcharge is applicable for taxes under Section 115AB, in respect of corporate bodies.

Is it possible to offset the capital loss on a mutual fund investment after a dividend declaration?

This is a practice that is popularly referred to as 'dividend stripping'. The capital loss from a dividend declaration can be offset if you have remained invested in the mutual fund 3 months before and 9 months after the dividend declaration. If you haven't adhered to this guideline then you cannot offset the capital loss arising from a dividend declaration.

What is the tax implication of a bonus/rights issue on mutual fund units?

Under Section 55(2) (AA), bonus on mutual fund units has a zero (nil) cost of acquisition. The holding period is calculated from the date of allotment of mutual fund units. The net sales proceeds are treated as the capital gain. The period of holding of such issue is reckoned from the date of the allotment of such issue.

The cost of acquisition of the rights issue on mutual fund units is the amount actually paid for acquiring such right, according to Section 55(2) (AA) (iii). The holding period is reckoned from the date of allotment.

Where there is a transfer of these rights, the cost of acquisition of such rights is to be taken as 'Nil' according to Section 55(2) (AA) (ii). Sale price of such transferred rights will be taken as capital gain.

The period of holding in the hands of the transferor is computed from the date of offer, made by the company to the date of renouncement.

Can a person having dual citizenship invest in mutual funds?

Yes, a person having dual citizenship can invest in Indian mutual funds.

What are the tax benefits for Non-Resident Indians (NRIs)?

Section 115E:  Under Section 115E of the Act, capital gains, chargeable on transfer of long-term capital assets of an Non-Resident Indians (NRIs) are subject to following rates of tax:

Investment income:	20%
Long term capital gains:	10%

Subject to education cess.

Section 10(23D):  Under provisions of Section 10(23D) of the Act, any income received by the Mutual Fund is exempt from tax.

Section 115R:  Under Section 115R, the Income distributed to a unit holder of a Mutual Fund shall be charged to following rates of tax to be payable by the Mutual Fund.

Amounts distributed to individual or HUF:	12.5% + 10% surcharge* + 3% education cess = 14.1625%
Amounts distributed to others:	20.0% + 10% surcharge* + 3% education cess = 22.66%

* Surcharge will be applicable if the income distributed is above Rs 1 Cr.

However, the above distribution tax will be exempted for open-ended equity-oriented funds (funds investing more than 65% in equity or equity related instruments).

Is wealth tax applicable to mutual fund investments?

No. Units, held under the scheme of the fund, are not treated as assets within the meaning of Section 2(EA) of the Wealth Tax Act, 1957 and are, therefore, not liable to Wealth-Tax.

Is gift tax applicable to mutual funds investments?

No. Units of the mutual fund may be given as a gift and no gift tax will be payable, either by the donor or the donee.

How can I avoid payment of capital gains on mutual fund investments?

The capital gain, which is not exempt from tax as explained above, can be invested in the specified asset, mentioned below, within 6 months of the sale.

Specified asset means any bond redeemable after 3 years:

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  Issued on or after April 1, 2000 by NHAI (National Highways Authority of India).
  
  
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  ? Issued on or after April 1, 2001 by the REC (Rural Electrification Corporation Ltd.).

Such capital gains can also be invested in any residential house property in accordance with Section 54F of the Act and one can claim exemption from capital gains.

Source: http://www.personalfn.com

Mother tongue & Primary education

The issue of medium of instruction at primary level of education has come up as a burning question during the last days. The first teacher of a child is the mother and the home his first school.  The next influence on his education is that of the environment. Need of the hour is that instead of thinking in the narrow orbit of politico-religious and regional interests, an angle of thinking keeping in view the interest of the child be adopted. In this context our approach should be a scientific and psychological one and not a status symbol oriented or a part of the mad race.

According to Swiss psychologist Jean Piaget, the cognitive development of a child is related with the language development and depends considerably on the individual?s interaction with the environment. The child understands the world and interacts with the environment in a sequence. Under the language development, the child acquires the language from the very birth. In addition to the words, learns the skills of syntax. Learning of language changes child?s very world. Knowledge and development of language converts the child?s those views into words, which were previously a hazy picture only for him or her.

In the early years of life, the language development is quite fast. The child goes on refining the language during all the school years. In the school, vocabulary too gets enhanced very fast. The pronunciation improves. Syntax becomes more complete. The use of grammar is also improved.

A new born who can hardly talk and understand what others say, can by the end of four years understands 2500 to 2800 words and speaks about 1500 words. We need to understand and know how this development takes place. When a baby cries and the mother responds, the first step in communication takes place. An infant tells his or her need or discomfort by bodily movements or facial expressions. This is the simple and first form of communication.

Around 3 to 4 months infants manipulate their lips and tongue along with throat to produce sounds as ba, ma, pa, da etc. The people around the child repeat these combinations of sounds and the child produces words like ma, mama, baba, dada etc. The sounds thus produced are in fact learning of simple words.

An infant of 6-7 months starts repetitive sequence of mama, papa etc. At 9-10 months the infant repeats certain more words that attract infant?s attention. By attaining the age of an year, the child learns single words which represent almost a sentence as ?ball? may mean ?there is a ball, give me ball?. The single word then takes place of double words like ?ball give?, ?dog go?, ?papa come?. The communication by the child at this stage is of telegraphic nature.

After two years the child makes a speedy progress in learning the language. The child first learns nouns then verbs, adjectives, adverbs. Pronouns, conjunctions, prepositions are learnt at a later stage. By 4-5 years the child understands and speaks enough of the native language. But the child cannot understand words like so, therefore, because, although, inspite of etc. They do not make out double meaning words like bright, hard, sweet, cold etc. They cannot understand idioms, phrases and taunting utterances. The child?s speech is ego-centric irrespective of the fact whether anyone listens or not. The child speaks to associate with others present there or just to register his or her activity or presence. He is capable of playing ?house-house? alone with dolls. He is not perfect in interaction at this stage. Colour, size, voice, shape, smell etc too can be understood upto some extent only. The child is imperfect in mother tongue too.

In India the child is exposed to more than one language. Especially in the urban scenario, the child speaks language A at home, B in the neighborhood and language C in school as medium of instruction. Thus the child has to handle three languages at a time. Undoubtedly the situation is a problematic one.

The child of 3-4 years is in the process of learning the mother tongue. When this child goes to a school where the medium of instruction is different, the child has to start the process of learning the new language all over again. This is natural that it may create confusion for the child while learning a new language. The earlier language learnt, comes in conflict with the new one. In other words the mother language is bound to interfere in learning the new language.

The interference occurs in the following ways:-

1.    Any language has its own sounds. In India we have a variety of languages in force and every language has numerous dialects. The way of pronouncing is different in Bangla and Tamil. Malyalam is different from Hindi. The first problem in learning a new language is its sound and rhythm. The pronunciation of the earlier language influences the new one and vice versa.

2.    Borrowing of words: Words of one language may creep into the other.

3.    Difficulty in sentence formation: Every language has its own way of forming the sentences. In a particular way the subject and the verb or the preposition and the connectives are placed. A child has adapted to the grammar of the mother tongue and while learning the new language he may have the tendency to construct the sentences in the same way.

In addition to these difficulties multilingualism affects other aspects also. Language is a mode of communication between individuals. Mother tongue is the language in which the child has learnt to express and understand in a manner the child feels comfortable. In learning a new language the child may have natural aversion, he or she may resist or the resistance may not be expressed which can prove more fatal.

Children are very conscious of what others say and think about them. Some children may be hesitant in learning a new language as they are afraid of making errors. The inability to learn may hinder the child?s interaction with the teachers and the peer group.

In India so many languages like Hindi, Punjabi, Kannad, Bangla, Tamil, Oriya, Malyalam, Marathi,Urdu etc enjoy a status of the mother tongue. Here English is spoken as mother tongue in a very limited section of society or area. The Germans do not recognise English as a complete language. The grammar of English at certain odd places is derailed from the track of rules. The tiny tot who is familiar with vernacular language, while learning ?aunt? in English looks for ?mausi, maamee, bua, chachi, tayee? and similarly when it comes to ?uncle?, he finds proper words for  ?maama, mausa, fufa, chacha, taya? etc. He is astonished as to where all these relations have gone.

We think and view in our mother tongue irrespective of the fact we have attained a degree of PhD in English. We feel comfortable and normal in our mother tongue only. After getting a command over one language, it is easy to learn the second and then third language. Today our so called English schools have gone unreined. The specifications stipulated for the books etc are kept at an arm?s length. They start English in the beginning and then regional and national language with their sweet will. The child is burdened with learning an entirely new language from the classes like play way which stand for playing and nursery which means to take care of the child. What do these schools wish to prove by teaching two more languages to a child who is hardly well conversant with the mother language even?

The parents, the educationists and the custodians of the child rights should adopt a sympathetic attitude of thinking in the larger interest of the child and should not be prone to false status symbol and the part of the mad race. How fair it would be if we leaving aside our religious political and native interests and keeping in view the larger interest of the kids, impart the primary education in the mother tongue and then start with the national language Hindi and link language English afterwards.

Benefits of having fruits and Vegetables

KNOW ABOUT THE BENEFITS OF HAVING FRUITS AND VEGETABLES   REGARDS, MANIKA

Fruit	Benefit	Benefit	Benefit	Benefit	Benefit
apples	Protects your heart	prevents constipation	Blocks diarrhea	Improves lung capacity	Cushions joints
apricots	Combats cancer	Controls blood pressure	Saves your eyesight	Shields against Alzheimer's	Slows aging process
artichokes	Aids digestion	Lowers cholesterol	Protects your heart	Stabilizes blood sugar	Guards against liver disease
avocados	Battles diabetes	Lowers cholesterol	Helps stops strokes	Controls blood pressure	Smoothens skin
bananas	Protects your heart	Quiets a cough	Strengthens bones	Controls blood pressure	Blocks diarrhea
beans	Prevents constipation	Helps hemorrhoids	Lowers cholesterol	Combats cancer	Stabilizes blood sugar
beets	Controls blood pressure	Combats cancer	Strengthens bones	Protects your heart	Aids weight loss
blueberries	Combats cancer	Protects your heart	Stabilizes blood sugar	Boosts memory	Prevents constipation
broccoli	Strengthens bones	Saves eyesight	Combats cancer	Protects your heart	Controls blood pressure
cabbage	Combats cancer	Prevents constipation	Promotes weight loss	Protects your heart	Helps hemorrhoids
cantaloupe	Saves eyesight	Controls blood pressure	Lowers cholesterol	Combats cancer	Supports immune system

Indeed having these fruits and vegetables is going to help us a lot, but does the existing inflation rate really gonna make these things affordable? That is a big question, which is generally answered very diplomatically!