Empower Beginners Taxation on Mutual Fund Income.

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Arron Green
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1 Empower Beginners Taxation on Mutual Fund Income

2 Areas Covered Classification of asset class based on taxation point of view. Types of income from mutual fund. Dividend & Capital Gain Tax treatment for Income from the mutual funds. How to chose the option ( Growth, Div, Dividend Reinvest) for the clients.

3 Classification based on Taxation rule Equity - More than 65%of money is invested into equity. Arbitrage Equity Savings Some Dynamic Asset Allocation All equity funds Non Equity Less than 65% money into Equity All Debt schemes

4 Types of Income DIVIDEND Paid out of the distributable income CAPITAL GAIN Difference of NAV ȋgain other than dividendȍ

Case Study Fund A Investment Amount Rs 100000/- at NAV of Rs 10/ NAV of the

5 Case Study Fund A Investment Amount Rs /- at NAV of Rs 10/ NAV of the Fund Rs 15/- Dividend Declared 20% NAV of the Fund At the time of redemption Rs 14

6 How Dividend is Calculated Dividend is declared on the Face Value and not on NAV Div Rs 2 Per Unit Total Unit * Per Unit Dividend 10000*2 = 20000/-

7 How Capital Gain is Calculated Capital Gain is the NAV difference of the Redemption NAV and Investment NAV ( Redemption NAV Investment NAV)* Total Units Sold (Rs 14-10)*(10000) Rs 4*10000= Rs 40000/-

8 Tax on Dividend Income EQUITY Tax Free DEBT Tax free into the hand of investor Company need to pay dividend distribution tax ȋddtȍ Individual 25%+Surcharge Corporate 30%+Surcharge

9 Types of Capital Gain Short Term Capital Gain Debt Less than, 36Months Equity Less than 12 Months Long Term Capital Gain Debt More than 36 Months Equity More than 12 months

10 Tax on Capital Gains Equity STCG 15% LTCG Tax Free Debt STCG As per Tax Slab LTCG 20% after indexation

11 What Is Indexation When Non Equity oriented* mutual fund are sold after 3 years, the gain due to change in NAV is called Long term Capital Gain. * Any fund investing less than 65% into the Indian equity and equity related securities, the fund is considered as the non equity fund for the purpose of taxation.

12 How To Calculate Tax With Indexation EXAMPLE: Let's say that you have invested Rs 1 lakh in a mutual fund on April 30, 2012 Purchase in FY CII And redeemed these units at Rs 1.3 lakh on April 5, According to the Cost Inflation Index levels announced by the government every year, the cost of acquisition would be deemed to be Rs 1,26,878. Your long term capital gain on this transaction is just ( ) Rs The tax liability (20%) thus would be Rs 624. Calculation of adjusted cost after indexation would be Actual Cost*Index when units sold Index when purchase * =1,26,878

13 FD vs Debt Funds INDEXATION MAKES A DEBT FUND A SUPERIOR POST TAX PRODUCT COMPARED WITH FD, ASSUMING THAT THEY EARN THE SAME RETURNS. Period FD with 8.5% interest Investment Pre tax FV Post tax Tax 3 years years Period Debt Fund with 8.5% return Investment Pre tax FV Post tax Tax 3 years years *Assuming the cost inflation index growth of 7% yoy

14 Negative Compounding due to Tax Value of Rs5Lacs after 20 years on various tax slabs Return Assumed 8% Inflation Index growth assumed 7%

Taxation Summery Particulars Short Term Capital Gains Long Term Capital Gains Short Term Tax Rate Long Term Tax Rate Dividend Distribution Tax Equity

15 Taxation Summery Particulars Short Term Capital Gains Long Term Capital Gains Short Term Tax Rate Long Term Tax Rate Dividend Distribution Tax Equity Schemes < 12 Months > 12 Months 15% NIL NIL Debt Schemes < 36 Months > 36 Months As per slab 20% after Indexation Individual/HUF/NRI 25%, Corporates 30%

16 Which Option to Select? Growth?? Dividend Payout?? Div Reinvest?? 1) Equity Less than 12 months Div or Div Reinvest 2) Equity More than 12 months Growth is Ideal 3) Debt Less than 36 months Div if tax bracket is 20% or else Growth 4) Debt More than 36 months Growth is Ideal

17 Summary Indentify the clients need. Analyze the tax impact of various options available for the client. Considering the tax impact on investment based on client s profile adds a lot of value to the client s portfolio and your advise.

18 Thank You Contact No: / mutualfunds@fairwealth.in

(A) (B) (C) (D) (A+D)

(A) (B) (C) (D) (A+D) Taxation - Debt MF Dividend RI: Pramod redeemed entire units of debt oriented mutual fund on 31 December 2011 at Rs 22.16. He originally purchased 3500 units at Rs 18.27 during 2007-08.He received dividends