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| Tax Treatment of Investment In Mutual funds: |
| Taxation: |
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The following summary outlines the tax benefits available to the Unitholders |
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The following information is provided for general information only. However, in view of the individual nature of the tax benefits, each investor is advised to consult with his/her own tax advisor with respect to the specific tax implications arising out of his/her participation in the schemes of the fund. |
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1. Tax Issues concerning Mutual Fund
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LIC Mutual Fund is a Mutual Fund registered with SEBI and as such is eligible for benefits under section 10 (23D) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) to have its entire income exempt from income tax.
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The Mutual Fund will receive all income without any deduction of tax at source under the provisions of Section 196(iv) of the Act.
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By virtue of section 45 of the Wealth Tax Act, 1957, Wealth tax is not chargeable in respect of net wealth of a Mutual Fund registered under section 10(23D) of the Income Tax Act, 1961, hence LIC Mutual Fund is not liable to pay Wealth Tax under the provisions of the Wealth Tax Act, 1957.
Tax issues concerning Unit holders:
A) Tax on income in respect of units
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As per the section 10(35) of the Act, income received by investors under the schemes of LIC Mutual Fund is exempt from Income Tax in the hands of the recipient unitholders.
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As per section 115R of the Act, income distribution tax shall be levied at 12.5% plus surcharge for distribution made to individuals or Hindu Undivided Families and for any other person at 20% plus surcharge w.e.f. 09/07/2004. Further education cess @ 2% would be charged on amount of tax plus surcharge.
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TDS ON INCOME OF UNITS:
As per the provisions of section 194K and section 196A of the Act where any income is credited or paid on or after 1st April 2003 by a Mutual Fund, no tax is required to be deducted at source.
B) Deductions under Section 80C
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Deduction under section 80C is available only to an Individual/HUF on the basis of specified qualifying investment /contribution /deposits/payment made by tax payer during the previous year. Maximum amount deductible u/s 80C cannot exceed Rs. 1 lakh.
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Contribution to LICMF ULIS (being unit-linked insurance plan as notified by the Central Government) in the name of the individual himself/herself, spouse and any child of such individual in case of individual.
C) SECURITIES TRANSACTION TAX:
Securities Transaction Tax ("STT") is applicable on transactions of purchase or sale of units of Equity Oriented Fund entered into on a recognised stock exchange or sale of units of Equity Oriented Fund to the Mutual Fund.
The Finance Act, 2006 has revised the rates for levy of STT under Chapter VII of the Finance (No.2) Act 2004 with effect from June 01, 2006 which are given in the following table:
| Taxable Securities Transaction |
Rate |
Payable by |
Purchase of a unit of an equity oriented fund,
where --
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the transaction of such purchase is entered into in a recognised stock exchange; and
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the contract for the purchase of such unit is settled by the actual delivery or transfer of such unit.
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0.125% |
Purchaser |
Sale of a unit of an equity oriented fund, where --
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the transaction of such sale is entered into in a recognised stock exchange; and
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the contract for the sale of such unit is settled by the actual delivery or transfer of such unit.
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0.125% |
Seller |
Sale of a unit of an equity oriented fund, where --
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the transaction of such sale is entered into in a recognised stock exchange; and
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the contract for the sale of such unit is settled otherwise than by the actual delivery or transfer of such unit.
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0.025% |
Seller |
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Sale of unit of an equity oriented fund to the Mutual Fund itself.
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0.25% |
Seller* |
| * Mutual Fund is responsible for collecting the STT from every person who sells the unit to it. |
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(D) Tax on Capital Gains:
(i) Long Term Capital Gains:
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As per section 10(38) of the Act, any income arising from the transfer of a long term capital asset being a unit of an Equity Oriented Fund chargeable to securities transaction tax shall not form part of total income therefore, exempt from Income Tax.
(ii) Short Term Capital Gains:
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Units held for not more than twelve months preceding the date of their transfer are short term capital assets. Capital gains arising from the transfer of short term capital assets being unit of an open ended equity oriented fund which is chargeable to STT shall be liable to income tax @ 10% under section 111A of the Act. The said tax rate would be increased by applicable surcharge i.e. @10% for individuals, HUF,AOP,BOI having total income above Rs. 10 Lakhs, @ 10% for firms and domestic company, @ 2.5% for non-domestic company. The tax and surcharge will be increased by education cess @ 2%.
E. TAX DEDUCTION AT SOURCE
(1) FOR INCOME IN RESPECT OF UNITS: No tax shall be deducted at source in respect of any income credited or paid in respect of units of the Fund as per the provisions of Section 10(35), Section 194K and Section 196A.
(2) FOR CAPITAL GAINS:
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In respect of Resident Unit holders: No tax is required to be deducted at source on capital gains arising to any resident unit holder (under Section 194K) vide circular no.715 dated August 8, 1995 issued by the Central Board for Direct Taxes (CBDT).
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In respect of Non-Resident Unit holders: Under Section 195 and Section 196B of the Act, tax shall be deducted at source in respect of capital gains as under:
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In case of non resident other than a company -- |
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20% plus surcharge and cess |
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30% plus surcharge and cess |
| b. |
In case of foreign company -- |
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20% plus surcharge and cess |
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40% plus surcharge and cess |
| c. |
In case of Offshore Fund as defined in 115AB -- |
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10% plus surcharge and cess |
| 1 Except for gains arising from sale of unit of Equity Oriented Funds, which are exempt under Section 10(38) of the Act. |
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(F) Double Taxation Avoidance Agreement (DTAA):
As per Circular No. 728 dated October 30, 1995 issued by the CBDT, in the case of remittance to a country with which a DTAA is in force, the tax should be deducted at the rate provided in the DTAA, whichever is more beneficial to the assessee. In order for the unitholder to obtain the benefit of a lower rate available under a DTAA, the unitholder will be required to provide the Mutual Fund with a Certificate obtained from his Assessing Officer stating his eligibility for the lower rate.
(G) Short term Capital losses:
According to section 94(7) of the Act as amended by the Finance (No.2) Act, 2004, if any person buys or acquires units within a period of three months prior to the record date fixed for declaration of dividend or distribution of income and sells or transfers the same within a period of nine months from such record date, then losses arising from such sale to the extent of income received or receivable on such units, which are exempt under the Act, will be ignored for the purpose of computing his income chargeable to tax.
Further, Finance (No.2) Act, 2004 has inserted sub-section (8) in Section 94 which provides that, where additional units have been issued to any person without any payment, on the basis of existing units held by such person then the loss on sale of original units shall be ignored for the purpose of computing income chargebale to tax, if the original units where acquired within three months prior to the record date fixed for receipt of additional units and sold within nine months from such record date. However, the loss so ignored shall be considered as cost of acquisition of such additional units held on the date of sale by such person.
(H) Value of Investment in units under the scheme is completely exempt from wealth tax.
(I) The gift tax, 1958 has abolished the levy of gift tax in respect of gifts made on or after first October 1998. Thus, gifts of units on or after 1st October 1998 are exempt from gift tax.
Further, subject to certain exceptions, gifts from persons exceeding Rs. 25000/- are taxable as income in the hands of donee on or after 1st September 2004 pursuant to section 2(24) (xiii) of Act read with section 56 (2) (v) of the Act.
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