 What is the tax liability on receipt of income distributed on mutual fund units?
As per Section 10(33) of the Income Tax Act, 1961 (“Act”) income received in respect of units of a mutual fund specified under Section 10(23D) is exempt from income tax in India and the mutual funds are subject to paying distribution tax in debt-oriented schemes. Hence all the dividends are tax-free in the hands of Non-Resident Investors and no Tax Deduction at Source (TDS) is applicable on the same.
What is the tax liability on redemptions? What is the rate of Tax Deduction at Source for NRIs/Persons of Indian Origin (PIOs)? What is the tax-rate on capital gains for NRIs/PIOs?
Under Section 2(42A) of the Income Tax Act, units of the scheme held as a capital asset, for a period of more than twelve months immediately preceding the date of transfer, will be treated as a long-term capital asset for the computation of capital gains – thus attracting long-term capital gains tax rate. In all other cases it would be treated as a short-term capital asset and would attract short-term capital gains tax rate. Hence depending on the period of investments, long-term or short-term capital gains and tax thereon are applicable on redemptions.
| Type of Schemes |
Nature of Income |
Rate |
| Equity Oriented |
Short-term capital gains |
Capital gains tax at 10%* (applicable to all investors including Foreign Institutional Investors) |
| Long-term capital gains |
No capital gains tax payable by any investor. |
| Other Schemes |
Short-term capital gains |
In case of FIIs, 30%*
In case of other, taxed at normal tax rates
(as explained in Note 1). |
| Long- term capital gains |
In case of FIIs, 10%* (without indexation)
In case of others, 20%* (with indexation) or, 10%* (without indexation), whichever is less. |
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*Education Cess of 2% and a Surcharge of 10% (wherever applicable) would be added to the above rates.
Is there any tax liability on switching from one option to the other?
Yes. On switching from one option to the other option, the investor is liable to capital gains tax and TDS at the applicable tax rate.
Is Securities Transaction Tax applicable to NRI investors?
Yes
| Sr.No. |
Taxable Security Transaction |
Rate |
| 1 |
Purchase of an equity share in a company or a unit of an equity oriented fund, where (a) the transaction of such purchase is entered into in a recognized stock exchange; and (b) the contract for the purchase of such share or unit is settled by the actual delivery or transfer of such share or unit |
0.125% |
| 2 |
Sale of an equity share in a company or a unit of an equity oriented fund, where (a) the transaction of such sale is entered into in a recognized stock exchange; and (b) the contract for the sale of such share or unit is settled by the actual delivery or transfer of such share or unit |
0.125% |
| 3 |
Sale of a derivative, where the transaction of such sale is entered into in a recognized stock exchange |
0.017% |
| 4 |
Sale of unit of an equity oriented fund to the Mutual Fund |
0.25% |
|
Where can an investor get the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 and Schedule 5 thereof?
Investors can visit Reserve Bank of India’s (RBI) website http://www.rbi.org.in for all the details.
What is the proof for Tax Deduction at Source?
A TDS certificate is issued in the name of the investor mentioning the details of the transaction and the tax deducted. The TDS certificate is commonly known as Form16 A.
When will the TDS certificate be issued?
A TDS Certificate in Form 16A is dispatched in the month following the redemption date to the registered address of the investor. To obtain a duplicate TDS certificate, an investor can write a letter to the Registrar or the Asset Management Company quoting the folio number requesting for a duplicate TDS Certificate.
Is the indexation benefit available to NRIs?
Yes, in case the units are held for more than twelve months i.e. on long-term capital gains for debt schemes only.
Are mutual fund units chargeable to Wealth Tax?
No. Units issued to investors (including NRIs) etc. are not treated as assets as defined under section 2(ea) of the Wealth-Tax Act, 1957 and hence are not liable to wealth tax.
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