Taxation of dividends of mutual fund schemes. Liquid funds 25.75% 28.32% Other debt funds. Equity funds Nil Nil

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1 8 Tax Corner Tax Corner Mutual Fund What tax benefits are available to those who invest in mutual funds? Dividends declared by debt-oriented mutual funds (i.e. mutual funds with less than 65% of assets in equities), are taxfree in the hands of the investor. However, a dividend distribution tax (which varies for individual and corporate investors) is to be paid by the mutual fund on the dividends declared. Dividends declared by equity-oriented funds (i.e. mutual funds with more than 65% of assets in equities) are tax-free in the hands of investor. There is also no dividend distribution tax applicable on these funds. Diversified equity funds, sector funds, balanced funds (with more than 65% of net assets in equities) are examples of equity-oriented funds. Taxation of dividends of mutual fund schemes Category Individuals Tax rates for Corporates Liquid funds 25.75% 28.32% Other debt funds 12.87% 22.66% Equity funds Nil Nil The amount invested in tax-saving funds (ELSS) is eligible for deduction under Section 80C, however the aggregate amount deductible under the said section cannot exceed Rs 100,000 (in a financial year).taxation of Dividends earned on Debt Funds

2 8.1.1 Tax Corner Tax Corner Mutual Fund 1 Tax on dividend declared by debt-oriented funds Resident individual/huf Partnership firm/aop/boi Domestic company* NRI Dividend Income Dividend DistributionTax Other than Liquid /Money Market Schemes Dividend DistributionTax Liquid /Money Market Schemes Tax free Tax free Tax free Tax free % (12.50% % (20% % (20% % (12.50% + 3% education cess)> % (12.50% % (20% % (20% % (12.50% % (25% % (25% % (25% % (25% % (25% % (25% % (25% % (25% + * No surcharge will be applicable for Domestic Companies if the dividend received by them is less than Rs 1 Cr. "No Surcharge for Resident Indians, Partnership Firms and NRIs:"

3 8.1.2 Tax Corner Tax Corner Mutual Fund 2 Capital gains tax on debt-oriented funds Short-term Capital Gains Tax Long-term Capital Gains Tax TDS Resident individual/huf As per Income Tax slab 10% (20% with indexation) Nil Partnership firm/aop/boi Domestic company 30% NRI As per Income Tax slab STCG - 30% LTCG - 20% (after providing for indexation) + 10% surcharge + 3% cess

4 8.1.3 Tax Corner Tax Corner Mutual Fund 3 How are equity-oriented funds defined? A mutual fund must have at least 65% of its net assets in equities/stocks to qualify as an equity-oriented mutual fund. Do global equities qualify as equities while defining equity-oriented funds?no, global equities do not qualify as equities while defining equity-oriented funds. Only investment in Indian equities qualify for this purpose. In other words, if an equity fund invests 100% of its net assets in global equities it will qualify as a debt fund according to the Indian Income Tax laws. Do equity/balanced funds have to maintain a daily, minimum 65% equity allocation?not really, the equity allocation is calculated based on the weekly average net assets in equities. If this average is below 65%, the fund stands to forfeit its equityoriented status. Do balanced funds qualify as equity-oriented funds? If balanced funds maintain a minimum (average) 65% equity allocation, they do qualify as equity-oriented funds.is a capital gain on sale/transfer of units of mutual fund liable to tax? If yes, at what rate?section 2(42A): Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-term capital asset if the same is held for less than 12 months. The units held for more than twelve months are treated as long-term capital asset. Section 10(38): Under Section 10(38) of the Act, long-term capital gains arising from transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities transaction tax is paid to the appropriate authority. This makes long-term capital gains on equity-oriented funds exempt from tax from assessment year Short-term capital gains on equity-oriented funds are chargeable to (plus education cess). However, such securities transaction tax will be allowed as rebate under Section 88E of the Act, if the transaction constitutes business income. Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket applicable (marginal tax rate) to the investor. Long-term capital gains on debt-oriented funds are subject to of capital gains after allowing indexation benefit, or at 10% flat without indexation benefit, whichever is less. Section 112: Under Section 112 of the Act, capital gains, not covered by the exemption under Section 10(38), chargeable on transfer of long-term capital assets are subject to following rates of tax:

5 8.1.4 Tax Corner Tax Corner Mutual Fund 4 Resident Individual, HUF & Partnership Firms - 20% plus education cess. Indian Companies - 20% (plus surcharge if applicable and education cess). Foreign Companies - 20% (plus surcharge if applicable and education cess). Capital gains will be computed after taking into account the cost of acquisition as adjusted by Cost Inflation Index, notified by the Central Government. "Units" are included in the proviso to the sub-section (1) to Section 112 of the Act and hence, unit holders can opt for being taxed at 10% (plus surcharge if applicable and education cess) without the cost inflation index benefit or 20% (plus surcharge if applicable and education cess) with the cost inflation index benefit, whichever is beneficial. Under Section 115AB of the Income Tax Act, 1961, long-term capital gains in respect of units, purchased in foreign currency by an overseas financial, held for a period of more than 12 months, will be chargeable at the rate of 10%. Such gains will be calculated without indexation of cost of acquisition. No surcharge is applicable for taxes under Section 115AB, in respect of corporate bodies. Is it possible to offset the capital loss on a mutual fund investment after a dividend declaration?this is a practice that is popularly referred to as 'dividend stripping'. The capital loss from a dividend declaration can be offset if you have remained invested in the mutual fund 3 months before and 9 months after the dividend declaration. If you haven't adhered to this guideline then you cannot offset the capital loss arising from a dividend declaration. What is the tax implication of a bonus/rights issue on mutual fund units? Under Section 55(2) (AA), bonus on mutual fund units has a zero (nil) cost of acquisition. The holding period is calculated from the date of allotment of mutual fund units. The net sales proceeds are treated as the capital gain. The period of holding of such issue is reckoned from the date of the allotment of such issue.the cost of acquisition of the rights issue on mutual fund units is the amount actually paid for acquiring such right, according to Section 55(2) (AA) (iii). The holding period is reckoned from the date of allotment. Where there is a transfer of these rights, the cost of acquisition of such rights is to be taken as 'Nil' according to Section 55(2) (AA) (ii). Sale price of such transferred rights will be taken as capital gain.the period of holding in the hands of the transferor is computed from the date of offer, made by the company to the date of renouncement.

6 8.1.5 Tax Corner Tax Corner Mutual Fund 5 Can a person having dual citizenship invest in mutual funds? Yes, a person having dual citizenship can invest in Indian mutual funds. What are the tax benefits for Non-Resident Indians (NRIs)? Section 115E: Under Section 115E of the Act, capital gains, chargeable on transfer of long-term capital assets of an Non-Resident Indians (NRIs) are subject to following rates of tax: Investment income: 20% Long term capital gains: 10% Subject to education cess. Section 10(23D): Under provisions of Section 10(23D) of the Act, any income received by the Mutual Fund is exempt from tax. Section 115R: Under Section 115R, the Income distributed to a unit holder of a Mutual Fund shall be charged to following rates of tax to be payable by the Mutual Fund. Amounts distributed to individual or HUF: 12.5% + 3% education cess = % Amounts distributed to others: 20.0% + 10% surcharge* + 3% education cess = 22.66% * Surcharge will be applicable if the income distributed is above Rs 1 Cr.However, the above distribution tax will be exempted for open-ended equity-oriented funds (funds investing more than 65% in equity or equity related instruments). Is wealth tax applicable to mutual fund investments? No. Units, held under the scheme of the fund, are not treated as assets within the meaning of Section 2(EA) of the Wealth Tax Act, 1957 and are, therefore, not liable to Wealth-Tax. Is gift tax applicable to mutual funds investments?no. Units of the mutual fund may be given as a gift and no gift tax will be payable, either by the donor or the donee.how can I avoid payment of capital gains on mutual fund investments?the capital gain, which is not exempt from tax as explained above, can be invested in the specified asset, mentioned below, within 6 months of the sale.specified asset means any bond redeemable after 3 years:issued on or after April 1, 2000 by NHAI (National Highways Authority of India). Issued on or after April 1, 2001 by the REC (Rural Electrification Corporation Ltd.). Such capital gains can also be invested in any residential house property in accordance with Section 54F of the Act and one can claim exemption from capital gains

7 8.2.1 Tax Corner Tax Corner Life Insurance 1 What are the tax benefits available to an individual in respect of premium paid on life insurance policies? Life insurance premium paid by an individual qualifies for a deduction under Section 80C of Income Tax Act, An individual can claim deduction from gross total income on premium paid for a maximum of Rs 100,000 in each financial year. Amount deductible under Section 80C is equal to: 100% of the "qualifying investment", which includes life insurance premium, or Rs 100,000, whichever is lower. Certain investments and contributions have been specified as eligible ones for Section 80C. These investments/ contributions are eligible for deduction from gross total income. And a reduction in gross total income, leads to a reduction in the tax liability. Finally, the deduction limit for Section 80C has been pegged at Rs 100,000 per annum (pa). In other words, investors can make investments/contributions of upto Rs 100,000 every year and reduce their tax liability. 1 Payment of life insurance premium 2 Contribution to employee provident fund (EPF) 3 Repayment of principal amount on housing loan 4 Payment of tuition fees 5 Investments in Public Provident Fund (PPF) 6 Investments in National Savings Certificate (NSC) 7 Investments in tax-saving fixed deposits 8 Investments in tax-saving mutual funds (ELSS) 9 Investments in Infrastructure Bonds

8 8.2.2 Tax Corner Tax Corner Life Insurance 2 Comparison of Various Tax Saving Instruments

9 8.2.3 Tax Corner Tax Corner Life Insurance 3 What are the tax benefits available under pension plans? Premium paid towards a pension plan is eligible for a maximum benefit of Rs 100,000 under Section 80CCC. The said Section 80CCC limit falls under the overall Section 80C limit of Rs 100,000. In other words, the deduction aggregate, under Section 80C, 80CCC and 80CCD cannot exceed Rs 100,000. Are maturity proceeds on life insurance and pension policies taxable? The maturity proceeds of life insurance policies are not taxable. However, under pension plans, upto one-third of the maturity amount can be withdrawn in cash and the same is treated as tax-free. An annuity has to be purchased with the remaining two-third amount. Pension receipts from the same will be treated as income in the hands of the assessed and taxed accordingly. Can tax benefits be claimed if the premium is paid by an individual on his/her spouse's policy? Tax benefits can be claimed by an individual who pays life insurance premium on behalf of his/her spouse's policy under Section 80C of Income Tax Act, If a person discontinues paying premium on his life insurance policy, does he get tax benefits? If a person stops paying premium amounts on his/her life insurance policy, it amounts to discontinuation of the policy. Hence, he is not entitled to claim any tax benefits. If a tax-payer discontinues the life insurance policy before premiums have been paid for a period of 2 years from the commencement of the policy, no tax deduction is allowed in respect of any premium paid on that policy in the year in which the policy is terminated. Further, the amount of tax deduction, allowed for the premium paid in the preceding year, is treated as income and taxable for the year in which the policy is terminated. If a person, investing in a Unit Linked Insurance Plan (ULIP), terminates his policy, can he claim any tax benefits on the same?i f a person participates in a Unit Linked Insurance Plan (ULIP) and then terminates his participation, he will not be entitled to claim any tax benefits. What are the deductions available in respect of a medical insurance premium? Medical insurance premium paid qualifies for deduction under Section 80D as follows:premium paid upto Rs 15,000 (in a financial year) is eligible for deduction from gross total income. In case of senior citizens, the limit is Rs 20,000. Assesses who pay medical insurance premium for their parents can claim an additional deduction of Rs 15,000 under Section 80D. In other words, an individual who pays medical insurance premium for himself and his parents will be eligible to claim tax benefits to the extent of Rs 30,000 i.e. Rs 15,000 (for himself) and Rs 15,000 (for his parents). Besides, Section 80-DD provides deduction in respect of expenditure incurred on the maintenance and medical treatment, of a dependent who is a person with severe disability. The deduction amount under this Section has been increased from Rs 75,000 to Rs 100,000.

10 8.3.1 Tax Corner Tax Corner Fix Deposite & Bonds What are the tax implications of investing in fixed deposits and bonds? Interest income on fixed deposits and bonds, such as 8% Savings (Taxable) Bonds is taxable under the head "Income from other sources". The entire income received is taxable. Can investors claim any tax benefits for investments made in fixed deposits/bonds under Section 80C? Similarly, are any benefits available to investors on the interest income? Investments in fixed deposits with a scheduled bank for a fixed period of not less than 5 years are eligible for deduction under Section 80C. Infrastructure bonds also qualify as eligible investment avenues under Section 80C. Section 10(15) states the list of various securities and bonds on which interest is exempt from tax. Are investments made in these instruments subject to tax deducted at source (TDS)? What is the limit below which TDS is not applicable? Yes, if the interest from such investments exceeds Rs 5,000 in a financial year then TDS is applicable. The TDS limit is raised to Rs 10,000 in case of interest payment on fixed deposits by a bank. Can investors avoid TDS; if yes what documents are required to be provided for the same? Investors can avoid TDS by presenting Form 15G, which states that the person does not have a taxable income.

11 8.2.3 Tax Corner Tax Corner Fix Deposite & Bonds If the bank deducts tax at source, how should an investor claim the benefit? The assessee has to file a return of income every year declaring his total income and the tax payable thereon. He can furnish the TDS certificate with the return filed and the tax payable would reduce accordingly. If additional tax has been paid, then the excess amount will be refunded to him by tax authorities.what are capital gains savings bonds & what benefits do they offer? Investments in capital gains savings bonds enable investors to avoid paying the capital gains tax. These bonds are issued by REC and NHAI. For example, when a property is sold and a long-term capital gains tax liability arises, the assessee has an option to avoid it by investing the capital gains in another property within the specified time duration. Another option available to him (to avoid paying tax) is to invest the requisite sum in capital gains bonds within a period of 6 months from date of transfer. Investors should ensure that these bonds are not transferred or converted within a period of 3 years from the date of acquisition; also no loan, mortgage or encumbrances should be created on these bonds. In such an event, investors will lose the tax benefits and capital gains will become taxable. Maximum investment allowed in these bonds (i.e. REC & NHAI) is Rs 5 m (50 lakhs) during any financial year.

12 8.3.1 Tax Corner Tax Corner Equity 1 Is there any tax implication while making an investment in shares? Are investors in shares entitled to any tax benefits? There is no tax implication while making an investment in shares. There are tax benefits to investing in some preapproved companies as mentioned in the third point below. The tax implication arises only at the time of sale of shares as under: If certain eligible equity shares are purchased on or after March 1, 2003 but before March 1, 2004 and are transferred after 12 months, then the gain on the sale of such shares will be entitled for exemption under Section 10(36) of the Income Tax Act, 1961 by eligible equity shares. This applies to any equity shares, which form part of the BSE 500 index of the Bombay Stock Exchange, the transaction of purchase and sale of which have been entered into through a recognized stock exchange in India and any equity shares, allotted through a public issue on or after March 1, 2003 and listed in a recognized stock exchange in India before March 1, 2004 and the transaction of such shares, if entered into through a recognized stock exchange in India. After October 1, 2004, any equity share, which has been sold through a recognized stock exchange and on which Securities Transaction Tax (STT) has been paid would be entitled to exemption from long-term capital gains under Section 10 (38) of the Act. Similarly, in case of short-term capital gain of such shares, the gains shall be taxed at 15% (plus education cess) in a financial year. Under Section 80C, any subscription to equity shares or debentures forming part of any eligible issue of capital, approved by the court or an application made by a public company or subscription to such eligible issue by a public finance institution in a prescribed form, would be eligible to deduction subject to the condition of this Section. Also, subscription to any unit of a mutual fund, approved by the board in respect of any mutual fund, referred to in Clause (23D) of Section 10, would also be entitled.

13 8.3.2 Tax Corner Tax Corner Equity 2 What is the tax implication of a bonus/rights issue on equity shares? Under Section 55(2)(AA), bonus on equity shares has a zero (nil) cost of acquisition. The holding period is calculated from the date of allotment of equity shares. The net sales proceeds are treated as the capital gain. The period of holding of such issue is reckoned from the date of the allotment of such issue. The cost of acquisition of the rights issue on equity shares is the amount actually paid for acquiring such right according to Section 55(2) (AA) (iii). The holding period is reckoned from the date of allotment.where there is a transfer of these rights, the cost of acquisition of such rights is to be taken as 'nil' according to Section 55(2) (AA) (ii). The sale price of such transferred rights will be taken as capital gain. The period of holding in the hands of the transferor is computed from the date of offer, made by the company to the date of renouncement. In case of the transfer of such rights, the cost of acquisition is the aggregate of the amount of purchase price, paid to the transferor to acquire the right entitlement and the amount, paid by him to the company for subscribing to such right offer of share. The period of holding in the hands of the transferee will be from the date of allotment of such shares. What is the tax implication on "split shares"? Is the cost of acquisition halved or is it taken as nil? What about the period of holding? The split shares represent the sub-divided shares of a lot of shares. The cost of such shares gets proportionately divided and the period of holding also continues to be the same as that of the original lot. What is the capital gains liability arising on sale of shares i.e. long-term/short-term? In case of equity or preference shares in a company, if the shares are held for more than 12 months immediately prior to its transfer then it is known as long-term capital asset and on transfer of long-term capital asset, long-term capital gain may arise. Long-term capital gains arising on transfer of equity shares will not be chargeable to tax, if such transaction of sale is entered on or after April 1, 2004, and is subjected to STT (Section 10(38)).

14 8.3.3 Tax Corner Tax Corner Equity 3 If an investor has multiple demat accounts, does he calculate capital gains on the first-in-first-out (FIFO) basis on each demat account separately or just once across all demat accounts? In case of multiple demat accounts, the capital gains on sale of shares has to be computed on the basis of the FIFO with reference to the particular account from where the shares are sold. The FIFO method was introduced to bypass the process of determining the cost on one to one basis with the particular Depository Participant. Can short-term capital gains be set-off by investing in capital gains bonds? No, Short-term capital gains cannot be set off by investing in capital gains bonds under Section 54EC. This benefit is only in respect of long-term capital gains. For how long can capital loss (short-term or long-term) be carried forward by investors? A capital loss (short-term/long-term) can be carried forward for a maximum period of 8 years from the assessment year in which the loss was first incurred. A short-term capital loss can be set off against any capital gain (long-term and short-term). However a long-term capital loss can be set off only against a long-term capital gain. What is the STT and how does it work? Are investments made prior to the STT regime eligible for the longterm capital gains tax waiver or is this facility available only to post - STT investments? The STT has been introduced by Chapter VII of the Finance Act (No.2) Act, It provides for a levy of a transaction tax on the value of certain transactions. These transactions include the purchase and sale of equity shares in a company, purchase and sale of units of an equity growth fund, sale of a unit of an equity growth fund to the mutual fund and sale of a derivative. The transaction tax will be payable on all transactions that have taken effect from October 1, 2004.

15 8.3.4 Tax Corner Tax Corner Equity 4 Whether securities transaction tax (STT) is applicable Transaction in recognised stock exchange in India Purchase of equity Sale of equity shares Sale of equity shares, shares, units of eq. units of eq. oriented units of eq. oriented oriented mutual fund mutual fund (delivery mutual Fund (non (delivery based) based) delivery based) of derivative Sale of unit of an eq. oriented fund to the mutual fund Yes Yes Yes Yes Yes Who has to pay STT Purchaser Seller Seller Seller Seller Rate of STT -from June 1, % 0.125% 0.025% Refer table below Tax treatment of long - term capital gain in the hands of seller Tax treatment of short-term capital gain in the hands of seller Tax treatment of business income in the hands of seller NA Exempt from tax under section 10(38) [long - term capital loss if any shall be ignored] NA Taxable at the rate of 15% (+surchage +education cess) under section 111A NA If income is shown as business income, one can claim tax rebate under section 88E Income is generally treated as business income Income is generally treated as business income One can claim tax rebate under section 88E Income is generally treated as business income Income is generally treated as business income One can claim tax rebate under section 88E Who will collect STT Stock exchange Stock exchange Stock exchange Stock exchange 0.25% Exempt from tax under section 10(38) [long-term capital loss if any shall be ignored] Taxable at the rate of 15% (+surchage +education cess) under section 111A One can claim rebate under section 88E Mutual fund Education cess: Nil Note: STT is not applicable in case of Government securities, bonds, debentures, units of mutual fund other than equity oriented mutual fund and in such cases, tax treatment of short - term and long - term capital gains shall be as per normal provisions of law.

16 8.3.5 Tax Corner Tax Corner Equity 5 Taxable Securities Transactions Rate Payable by (a) Sale of an option 0.017% on option premium Seller (b) Sale of an option in securities where option is exercised 0.125% on the settlement price Purchaser (c) Sale of a futures in securities 0.017% Seller (d) Purchase/Sale of equity shares, units of equity oriented mutual fund (delivery based) (e) Sale of equity shares, units of equity oriented mutual Fund (non delivery based) (f) Sale of unit of an equity oriented fund to the Mutual Fund 0.125% Purchaser/Seller 0.025% Seller 0.25% Seller Effect of levy of the STT:Long-term capital gain, arising to an investor from the sale of these specified securities, shall be exempt from tax under Section 10(38). Correspondingly, long-term capital loss, arising from these specified securities, cannot be set-off against any other gain/income. This loss shall lapse. ll be exempt from tax under Section 10(38).Short-term capital gain, arising to an investor (including FIIs) from the sale of such securities, shall be charged at 15%, plus education cess under Section 111A. This exemption of long-term capital gain is available to all assessees, including FIIs. This exemption is available only to those assessees, who hold these specified securities as capital assets (investments) and not as stock-in-trade. Correspondingly, at the year-end, the stock cannot be valued at cost or market value; whichever is lower, as it is not stock-in-trade. No deduction in the value of investments would be permissible. STT will be applicable only with effect from October 1, For the earlier period, i. e. from April 1, 2004 to September 30, 2004, the earlier law will be operative. The exemption of long-term capital gain is available only to transactions in relation to the specified securities. Exemption will not be available to transactions, not specifically mentioned in the list above. The exemption would be available even in respect of specified securities, purchased prior to the introduction of STT but sold after the operative date. The exemption is available to all shares. The earlier exemption, under Section 10(36), was restricted to shares, listed in BSE 500, which were purchased after March 1, 2004 but before April 1, 2004 and sold, after being held for more than twelve months. The exemption is available to all specified securities, sold through a recognised stock exchange. Private deals or transactions, not routed through a recognised stock exchange, will not be covered. The purchase of the specified securities could be through any mode and need not be through a recognised stock exchange. The exemption is not available to other securities, which are not specified, e.g. preference shares, bonds, debenture, etc. The exemption is not available to transactions where STT has not been paid. STT, paid for the purchase and for the sale of the specified securities, will not be available as a deduction. Since long-term capital gain would now be exempt from tax, Section 14A would come into play. This means that no expense shall be allowed to be claimed as a deduction in respect of income, which is exempt. For example, expenses like interest, rent, salaries, wages, electricity, telephone, water, etc. and other administrative expense will not be allowed, as a deduction since the income earned is exempt. Rebate, under Section 88E, is available in respect of STT from Assessment Year

17 8.3.6 Tax Corner Tax Corner Equity 6 Is the dividend income, received from investments in shares, taxable? Dividend, received from investment in shares, is not taxable in the hands of the recipient. The company, distributing the dividend, is required to deduct tax from the amount of dividend declared. Such tax deducted will not be entitled to TDS for the recipient. Do investments in shares have any Wealth Tax implications? Investments in shares do not have any Wealth Tax implications. Do investments in shares have any Gift Tax implications? Investments in shares do not have any Gift Tax implications. Investment in shares in the name of some other person other than the investors has Income-tax (gift) implications with effect from Financial Year These shares will now be treated as income. Are investments made by NRIs/foreigners subject to the same tax implications as applicable to resident Indian? NRIs are subject to lower rates of taxation. They have an option, either to choose the lower rate of tax on the capital gains or to choose the normal rate of tax if they want the cost to be indexed.