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16 October, 2021 21:09 IST
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Tax Issues
Taxing issues, not if you keep them in mind

Taxes don't leave you wherever you make money. But there are smart ways to deal with it. Best be informed.

The tax benefits for investing in mutual funds are as follows:

Sec 88 of the I.T. Act

Twenty percent of the amount invested in specified mutual funds (called equity linked savings schemes or ELSS) is deductible from the tax payable by the investor in a particular year subject to a maximum of Rs2000 per investor.

Section 54EA and 54EB of the I.T. Act.

In place of sections 54EA and 54EB, which are being terminated, a new section namely 54EC has been inserted for transfer of Capital Assets made on or after 01st April 2000. The new section will allow exemption from tax on long term capital gains, if invested in bonds, targeted exclusively on agricultural finance and highway infrastructure. The instruments in question shall be bonds, redeemable after 3 years, to be issued by National Bank for Agriculture and Rural Development(NABARD) and the National Highway Authority of India(NHAI). The exemption from longterm capital gains shall be to the extent of investment in these bonds.

Sec 115R of the I.T. Act

The mutual fund is completely exempt from paying taxes on dividends/interest/capital gains earned by it. While this is a benefit to the fund, it indirectly benefits the unitholders as well. A mutual fund has to pay a withholding tax of 10% on the dividends distributed by it under the revised provisions of the I.T. Act putting them on par with corporates. However, if a mutual fund has invested more than 50% of its assets in equity shares, then it is exempt from paying any tax on the dividend distributed by it, for a period of three years brought about by an overriding provision. This benefit is available under section 115R of the I.T. Act.

Section 10(33) of the I.T. Act

The investor in a mutual fund is exempt from paying any tax on the dividend received by him from the mutual fund, irrespective of the type of the mutual fund. This benefit is available as the units of mutual funds are treated as capital assets and the investor has to pay capital gains tax on the sale proceeds of mutual fund units sold by him. For investments held for less than one year the tax is equal to 30% of the capital gain. For investments held for more than one year, the tax is equal to 10% of the capital gains. The investor is entitled to indexation benefit while computing capital gains tax. Thus if a typical growth scheme of an income fund shows a rise of 14% in NAV after one year and the investor sells it, he will pay a 10% tax on the selling price less cost price and indexation component. This reduces the incidence of tax considerably. This concession is available under section 48 of the I.T. Act. The following calculations show this in more detail:

Purchase NAV = Rs 10

Sale NAV = Rs 11.4

Indexation component = 7%

Capital gains = 11.4 - 10(1.07)

= 11.4 - 10.7

= 0.7

Capital gains tax = 0.7*0.1 = 0.07.

If an investor buys a fresh unit in the closing days of March and sells it in the first week of April of the following year, he is entitled to indexation benefit for two financial years which close in the two March ending periods. This is termed as double indexation and lowers the tax even further especially for income funds. In the above example, the calculation would be as follows:

Capital gains = 11.4 - 10(1.07)(1.07)

= 11.4 - 11.45

= -0.05

Eventually in this case, there would be no capital gains tax.
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