Various tax implications and benefits for investors of mutual funds (India). http://www.koffeefinancial.com/Static/Learn.aspx

2. Tax implications
Tax implications would affect two areas of
income through mutual funds:
• Dividends
• Capital Gains

3. Dividends
• Dividends are income received from units of a mutual fund
registered with the SEBI is exempt in the hands of the unit
holder.
• A debt-oriented mutual fund is liable to pay income
distribution tax of 14.1625% and 22.66% on the distribution
of income to individual / Hindu Undivided Fund and other
persons, respectively.
• In the case of “money market mutual funds” and “liquid
mutual funds” (as defined under SEBI regulations), the
income distribution tax is 28.325% across all categories of
investors.

4. Capital Gains
• Long-term capital gains arising on the transfer of units of an
‘equity oriented’ mutual fund is exempt from income tax, if the
Securities Transaction Tax (STT) is paid on this transaction i.e., the
transfer of such units should be made through a recognised stock
exchange in India (or such units should be repurchased by the
relevant mutual fund).
• ‘Equity oriented’ mutual fund means a fund where the investible
corpus is invested by way of equity shares in Indian companies to
the extent of more than 65% of the total proceeds of the fund.

5. Capital Gains (Contd.)
• Short-term capital gains arising on such transactions are taxable
at a base rate of 15% (increased by surcharge as applicable,
education cess of 2% and secondary and higher education cess of
1%). If a transaction is not covered by STT, the long-term capital
gain tax rate would be 10% without indexation or 20% with
indexation, depending on which the assessee opts for. Short-term
capital gains on such transactions are taxable at normal rates.
• A taxable ‘capital loss’ (i.e., a transaction on which there is a
liability to pay tax if the result were ‘gains’ instead of ‘loss’) can be
set-off only against ‘capital gains’. An exempt capital loss (i.e., a
transaction which is exempt from tax if the result were ‘gains’
instead of ‘loss’) cannot be set-off against taxable capital gains.
• A taxable long-term capital loss can be set-off only against long-
term capital gains. However, a taxable short-term capital loss can
be set-off against both short-term and long-term capital gains.

6. Tax Saving Through MF
• Equity Linked Saving Scheme (ELSS) is a type of mutual
fund where a major fraction is invested in equity &
equity related instruments.
• An investment up to 1 lakh is exempted from income
under section 80C. There is, however, a lock-in of 3
years before one can withdraw the amount.
• There is no upper limit on investments and long term
capital appreciations are tax free. Dividends received
are also tax free in the hands of the investor.
• ELSS is a common instrument for planning and saving
taxes and it also ensures good returns.

7. Tax Saving Through MF (Contd.)
• There are two types of ELSS.
– Growth funds: The growth funds do not provide a
regular income during the time of the investment,
but delivers a lump sum amount at maturity.
– Dividend funds: These focuses on capital
appreciation and the dividend fund provides
dividends provide dividends which can either be
paid to the investor or re-invested into the same
scheme.

8. Thanks!
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