Tax Treatment for Mutual Funds / Long Term Capital Gain after Budget 2014-15
! FM ney MF ka band bajaya aur kisi ko pata tak nahin chala !
! Dhyan Sey Padhaiye Kaisey !
Will it effect MF inflows ?
Which in turn effect Capital Markets ?
! Dekhengey Hum Log !
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Budget Speech:
205. In the case of Mutual Funds, other than equity oriented funds, the capital gains arising on transfer of units held for more than a year is taxed at a concessional rate of 10% whereas direct investments in banks and other debt instruments attract a higher rate of tax. This allows tax arbitrage opportunity. This arbitrage has hardly benefitted retail investors as their percentage is very small among such Mutual Fund investors. With a view to remove this tax arbitrage, I propose to increase the rate of tax on long term capital gains from 10 percent to 20 percent on transfer of units of such funds. I also propose to increase the period of holding in respect of such units from 12 months to 36 months for this purpose.
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Section 10 Clause (38) of Income Tax says:
any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where—
(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force3; and
(b) such transaction is chargeable to securities transaction tax under that Chapter :
4[Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB.]
Explanation.— For the purposes of this clause, "equity oriented fund" means a fund—
(i) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than [sixty-five] per cent of the total proceeds of such fund; and
(ii) which has been set up under a scheme of a Mutual Fund specified under clause (23D) :
Provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;]
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Analysis:
A Mutual Fund (MF) is classified as EQUITY ORIENTED FUND (EOF) if more than 65% of the fund’s assets are invested in Equity Shares (not Equity related instruments, debts, bonds etc).
Return from EOF, if held for more than a year is Tax Free.
It means all the MF which invest even 65% in Eq Shares will be classified as NON EQUITY ORIENTED FUND (NEOF).
Only if a MF invests more than 65% of the assets in Eq Shares, shall they be classified as EQUITY ORIENTED FUNDS (EOF).
So all the balanced / hybrid MF with asset allocation of 65 % Eq & 35% Debt etc will face LTCG of 20% & 3 years period for becoming eligible for LTCG.
Suppose a MF invests as below:
Eq Shares 60%
Eq related instruments like derivatives etc 15%
Debts, Bonds etc 25%
Here 75% of the funds are deployed in Eq Markets, but the definition of EOF mentions only EQUITY SHARES & not Equity related instruments !
Therefore such fund will also not classify as EOF !!!
Practically all the funds will now face 20% LTCG / 3 years period for becoming eligible for LTCG as almost none of the MF purely invests in Eq Shares alone that too more than 65% of it’s assets.
:clapping: … Achchey Din Aaye Gaye … :clapping:
:lol: This is the same Party which was contemplating to abolish taxes :lol:
! FM ney MF ka band bajaya aur kisi ko pata tak nahin chala !
! Dhyan Sey Padhaiye Kaisey !
Will it effect MF inflows ?
Which in turn effect Capital Markets ?
! Dekhengey Hum Log !
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Budget Speech:
205. In the case of Mutual Funds, other than equity oriented funds, the capital gains arising on transfer of units held for more than a year is taxed at a concessional rate of 10% whereas direct investments in banks and other debt instruments attract a higher rate of tax. This allows tax arbitrage opportunity. This arbitrage has hardly benefitted retail investors as their percentage is very small among such Mutual Fund investors. With a view to remove this tax arbitrage, I propose to increase the rate of tax on long term capital gains from 10 percent to 20 percent on transfer of units of such funds. I also propose to increase the period of holding in respect of such units from 12 months to 36 months for this purpose.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Section 10 Clause (38) of Income Tax says:
any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where—
(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force3; and
(b) such transaction is chargeable to securities transaction tax under that Chapter :
4[Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB.]
Explanation.— For the purposes of this clause, "equity oriented fund" means a fund—
(i) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than [sixty-five] per cent of the total proceeds of such fund; and
(ii) which has been set up under a scheme of a Mutual Fund specified under clause (23D) :
Provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;]
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Analysis:
A Mutual Fund (MF) is classified as EQUITY ORIENTED FUND (EOF) if more than 65% of the fund’s assets are invested in Equity Shares (not Equity related instruments, debts, bonds etc).
Return from EOF, if held for more than a year is Tax Free.
It means all the MF which invest even 65% in Eq Shares will be classified as NON EQUITY ORIENTED FUND (NEOF).
Only if a MF invests more than 65% of the assets in Eq Shares, shall they be classified as EQUITY ORIENTED FUNDS (EOF).
So all the balanced / hybrid MF with asset allocation of 65 % Eq & 35% Debt etc will face LTCG of 20% & 3 years period for becoming eligible for LTCG.
Suppose a MF invests as below:
Eq Shares 60%
Eq related instruments like derivatives etc 15%
Debts, Bonds etc 25%
Here 75% of the funds are deployed in Eq Markets, but the definition of EOF mentions only EQUITY SHARES & not Equity related instruments !
Therefore such fund will also not classify as EOF !!!
Practically all the funds will now face 20% LTCG / 3 years period for becoming eligible for LTCG as almost none of the MF purely invests in Eq Shares alone that too more than 65% of it’s assets.
:clapping: … Achchey Din Aaye Gaye … :clapping:
:lol: This is the same Party which was contemplating to abolish taxes :lol:
