Mutual Fund Tax Reckoner

Subsequent to yesterday's blog post on tax impact of mutual fund investments in the hands of individuals, Bachhat has created a separate page on its website to provide complete overview of tax implications on mutual fund investments for all categories of investors.  The page provides tax implications for financial year 2012-13 and shall be updated each year.

The reckoner is shared below for reference.

Mutual Fund Tax Reckoner FY 2012-13



For full screen view of above tax reckoner, click here.


Do let us know your views and suggestions on the above reckoner.

Mutual Fund Investors: Know taxes impacting your returns

Mutual fund investors need to take in to account plethora of tax rates to understand the post tax returns.  In addition to separate rates for short term and long term capital gains, the rates varies amongst equity, debt and liquid funds.  Then one needs to take in to account dividend distribution tax (DDT) on dividends received.  Again it varies based on whether dividend is from equity fund or debt fund or liquid fund.  Further one also needs to factor in securities transaction tax (STT) to calculate correct post tax returns.  For liquid and debt funds, the effective tax rate can have a significant bearing on the overall returns on the investment.    

To help you to guide through this maze of tax rates, Bachhat has tried to list down the applicable rates for resident individual investors, HUFs as well as non-resident individual investors for the financial year 2012-13.

Capital Gains Tax 

Capital gains tax arises when one redeems the mutual fund.  If mutual fund units are sold within one year from the date of its purchase, the gain is treated as short term in nature.  Otherwise it is considered as long term in nature.  

The tax rates on sale of mutual fund investments for resident individuals, HUFs and non-resident individuals are as under:

Nature of Capital Gains	Equity Funds*	Other Funds
Short Term	15.45% (15% + 3% education cess)	I.T. rate applicable for slab + 3% education cess
Long Term	no tax	20% with indexation (10% without indexation) + 3% education cess)
Securities Transaction Tax	0.25% of sale value	not applicable

*Equity funds are the funds where more than 65% of the scheme AUM is invested in equity securities of domestic companies.

Gains for non-resident individuals are subject to tax deduction at source (TDS) as follows:

Type of funds	TDS Rate
Equity Funds	15.45% for short term cap gains, NIL for long term cap gains
Other Funds	30.90% for short term cap gains and 20.6% for long term cap gains after providing for indexation benefit

Dividend Distribution Tax (DDT)

This is the tax paid by the mutual fund companies at the time of payment of dividend to investors.  Since the amount is paid from the corpus of the fund, it leads to reduction in net asset value of the fund.  The DDT rate for resident individuals ,  HUFs and non-resident individuals is the same.

Type of Mutual Funds	DDT Rate
Equity Funds	no tax
Liquid Funds / Money Market Mutual Funds	25% + 5% surcharge + 3% education cess (effective tax rate of 27.0375%)
Any other mutual funds	12.5% + 5% surcharge + 3% education cess (effective tax rate of 13.51875%)

One need to take in to account the above tax impact while deciding on mutual fund investments and comparing it with other investment alternatives.

Bachhat has tried to cover all applicable tax implications for retail investors in mutual funds.  In case anything is missed out, do let me know via comments section so that the same can be incorporated.

Budget Rollbacks – respite for property buyers and jewellery merchants

Yesterday, Finance Minister Pranab Mukherjee announced few rollbacks from the budget proposals in his opening speech to discuss the Finance Bill 2012 in Lok Sabha. 

The rollbacks affecting individuals and investments are given below.  To help understand the rollback better, initial budget proposal is listed first, followed by the rollback proposed yesterday.

Budget Proposal: W.e.f October 2012, sale of residential property for transaction value more than Rs. 50 lakhs in specified urban agglomeration or Rs. 20 lakhs in any other area shall attract tax deduction at source of 1% of the transaction value irrespectively whether the transfer is profitable or not.

Revised Proposal: The above proposal has been withdrawn and there shall not be tax deduction at source on sale of residential property.

Budget Proposal: Cash purchase of bullion and jewellery for amount more than Rs. 2 lakhs shall lead to tax collection of 1% of the value by the seller.

Revised Proposal: The threshold limit of Rs. 2 lakhs has been increased to Rs. 5 lakhs in case of cash purchase of jewellery. The threshold limit for cash purchase of bullion has been retained at Rs. 2 lakhs.  However, it is clarified that bullion will not include any coin or other article weighing 10 gms or less.

Budget Proposal:  Imposition of central excise duty on unbranded precious metal jewellery at the rate of 1%.

Revised Proposal: The levy of central excise duty on all precious metal jewellery, branded and unbranded, has been withdrawn.

Additional Proposal:  Sale of unlisted securities in an initial public offer, which were hitherto charged to capital gain tax, shall be exempted from long term capital gains tax.  Instead of long term capital gains tax, securities transaction tax @ 0.2% shall be levied on such sales.  However, short term capital gains tax on such sale is still applicable at marginal tax rate.

Thus it can be seen that the long nation-wide strike by jewellery merchants has been effective and they got the rollback sought for.  However, Finance Minister failed to provide clarity on the Rajiv Gandhi Equity Scheme, which proposed to give 50% deduction of investment made in equities by individuals earning less than Rs. 10 lakhs.  The nature of such scheme and its benefit to investors at large remains unclear.

Are fixed deposits’ interest rates headed down?

RBI reduced the repo rates by as much as 50 basis points to 8.0% on 17^th April 2012, more than 25 basis points anticipated by the market participants and analysts.  100 basis points equals to 1 percentage point.  This cut is after 13 consecutive increases in rates since March 2010.  Due to the uncertainty over the global economy and continuing elevated inflation in domestic economy, it is not certain whether RBI will further cut rates during the year, but there shall not be any immediate increase in rates for the time being.

Effect of RBI’s rate cut on fixed deposits’ interest rates

There has been immediate effect of the RBI’s rate cut on fixed deposits’ rates and several banks have reduced interest rates on fixed deposit for all tenures.  Based on Bachhat’s tracking of fixed deposit rates, out of 30 banks which have revised interest rates on fixed deposits since 20^th March 2012 (the latest day on which FD rates were tracked by Bachhat), 22 banks have reduced the interest rates on fixed deposits and most of the reduction in interest rates happened after RBI’s rate cut on 17^th April 2012.  Only 8 banks have increased rates on fixed deposits during this period.  There are 22 banks which have not modified their fixed deposit rates during this period.

For example, Bank of Baroda has revised its interest rates downwards by 50 basis points for all tenures offered.  Similarly IDBI has reduced interest rates by 25 basis points for most of the tenures offered.  Following banks have reduced interest rates on fixed deposits since March 20^th, 2012:

Bank of Baroda	Barclays Bank	Canara Bank
Catholic Syrian Bank	Central Bank of India	Corporation Bank
Federal Bank	ICICI Bank	IDBI Bank
ING Vyasa Bank	Kotak Mahindra Bank	Lakshmi Vilas Bank
Oriental Bank of Commerce	Punjab & Sind Bank	Punjab National Bank
State Bank of India	State Bank of Patiala	State Bank of Travancore
Syndicate Bank	Tamilnad Mercantile Bank	UCO Bank
United Bank of India

Though the interest rates on fixed deposits have reduced since RBI’s rate cut, when compare to increase in fixed deposit rates during last 2 years, the rates are still attractive and for those who have missed the opportunity to lock high interest rates can still take benefit of it.  As regards future rate scenario, it all depends on how RBI reacts which in turn depends on host of events such as inflation, growth, Government’s policy measures and global economy.

To view interest rates on fixed deposits offered by all banks, click here.