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FAQs on Taxes on Mutual Funds What is the tax liability on receipt of Income on Mutual Fund Units?
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What is the tax liability on Redemptions? What is the rate of Tax Deduction at Source for NRIs / PIOs? What is the tax - rate on capital gains for NRIs / PIOs?
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Tax Rates and TDS Rates to NRI’s / PIO’s / FII’s?
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Is the indexation benefit available to NRIs?
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Can an NRI gift the units of MFs to resident Indians?
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Are units of MFs chargeable in Wealth Tax? Is Securities Transaction Tax applicable to NRI investors? Is there any Tax liability on switching from one option to the other? What is the tax liability on receipt of Income 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 pay distribution tax in debt-oriented schemes. Hence all dividends are tax-free in the hands of non-resident investors and no TDS is applicable on the same. Top
What is the tax liability on Redemptions? What is the rate of Tax Deduction at Source for NRIs / 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 capital gains and tax thereon is applicable on redemption’s. Though there is currently no long-term capital gain tax liability for redemptions from equity schemes, there is a liability at the time of redeeming from the debt schemes Top
Tax Rates and TDS Rates to NRI’s / PIO’s / FII’s? I. Income from Units of a mutual fund specified under section 10(23D) of the Income-tax Act, 1961 (the Act) is exempt in the hands of unit holders under section 10(35) of the Act. No income tax is deductible under section 194K and 196A of the Act on any income distribution by the Mutual Fund. II. Capital Gains and TDS thereon:
Tax Rates* under the Act
TDS Rate* under the Act
Residents NRIs / PIOs
NRIs / PIOs / other Residents Non FII nonresidents
Units of a non Taxable at normal rates of tax equity applicable to the assessee oriented fund
FIIs
30% without indexation benefit (u/s 115AD)
Short Term Capital units of Gain an 10% on redemption of units where STT is payable equity on redemption (u/s 111A) oriented fund units of a non 10% without indexation, or 20% equity with indexation, whichever is lower oriented (u/s 112) fund
Equity Funds
10% with no indexation benefit (u/s 115AD)
Long Term Capital units of Gain an ** Exempt in case of redemption of units where equity STT is payable on redemption [u/s 10(38) ] oriented fund
FIIs
NIL
30% for non residents non corporate, 40% for non resident corporate, (u/s 195)
Nil
NIL
20% for non residents (u/s 195)
NIL
Nil
Nil
NIL
*Plus surcharge as applicable: corporate, co-operative societies, firms and local authorities: 10% ; Individuals/HUFs/BOIs/AOPs, with total income exceeding Rs.10,00,000 : 10%; Artificial juridical person: 10%. ** Capital Gains on redemption of units held for a period of more than 12 months from the date of allotment. *** As per section 111A of the Act, effective from 1/10/2004 short-term capital gains on equity oriented fund is chargeable to tax at a Lower rate of 10 percent. •Long Term Capital Gains arising from redemption of unit of a non equity oriented fund are exempt from tax, if gains are invested in specified bonds within 6 months from the date of redemption, under Section 54EC of the Act or if gains are invested in eligible equity issues within 6 months from the date of redemption, under Section 54ED of the Act. •In order for the unit holder to obtain the benefit of a lower rate under the DTAA, an eligibility certificate from unit holder’s Assessing Officer should be provided to the Fund. Top
Is the indexation benefit available to NRIs? Yes, in case units are held for more than twelve months i.e. on long-term capital gains. Top
Can an NRI gift the units of MFs to resident Indians? An NRI may gift the units to any investor Indian or an NRI. Units gifted by any person would not be liable to any gift tax since the units held under the schemes are also not subject to provisions on the Gift Tax act, 1958. Top
Are units of MFs chargeable in Wealth Tax? No. Units issued to investors (including NRIs) etc. will not be treated as assets as defined under section 2(ea) of the Wealth-Tax Act, 1957 and hence will not be liable to wealth-tax.
Top
Is Securities Transaction Tax applicable to NRI investors? Yes. Top
Is there any Tax liability on switching from one option to the other? Yes. On switching from the Growth option to the Dividend option, the investor is liable to TDS at the applicable tax rate. Top
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