Budget 2014 saw two changes in the tax applicable to mutual fund investments. One is the Dividend Distribution Tax (DDT) and the second is the Capital Gains Tax on non equity schemes i.e. all schemes other than pure equity schemes.
The FM has removed an anomaly in DDT where effective tax rate was lower than the actual tax rate. Simply put, if a fund paid a dividend of 8% and DDT is 28.33%, the tax paid was calculated as 28.33% = (x/(8-x)), where x is the tax paid on dividend. Solving for x, the tax paid on dividend is Rs 1.77 or 22.1%, which is lower than 28.33% DDT. All debt mutual funds pay DDT of 25% plus surcharge on dividends, which works out to 28.33%.
Equity mutual fund schemes do not have to pay DDT while companies paying dividend have to pay 15% plus surcharge as DDT.
Investors earning dividend income will receive lower dividend post the DDT amendment.This is applicable from 1st October 2014.
The FM has removed the benefit of a twelve month holding period for classification of short term capital assets on all non equity mutual fund schemes. The benefit of 10% capital gains before indexation has also been taken away. Hence all non equity mutual fund units are classified as short term capital asset if held for a period of less than thirty six months. This is applicable from 1st April 2015 or AE 2015-16 for all redemptions post 10th July 2014
The ruling places mutual fund schemes at a disadvantage relative to bonds, as listed bonds would have the benefit of twelve months holding period with 10% non indexation capital gains benefits. However dividend paid out by mutual fund schemes would carry lower tax rate than interest on bonds due to DDT.
Finance Bill 2014
Dividend and Income Distribution Tax
Currently according to dividend distribution tax (DDT) a lower rate of 15% is applicable but this rate is being applied on the amount paid as dividend after reduction of distribution tax by the company.Therefore, the tax is computed with reference to the net amount. Similar case is there when income is distributed by mutual funds.
Due to difference in the base of the income distributed or the dividend on which the distribution tax is calculated, the effective
tax rate is lower than the rate provided in the respective sections.In order to ensure that tax is levied on proper base, the amount of distributable income and the dividends which are actually received by the unit holder of mutual fund or shareholders of the domestic company need to be grossed up for the purpose of computing the additional tax.
Consider following example
Thus, where the amount of dividend paid or distributed by a company is Rs. 85, then DDT under the amended provision
would be calculated as follows:
Dividend amount distributed = Rs. 85
Increase by Rs. 15 [i.e. (85*0.15)/(1-0.15)]
Increased amount = Rs. 100
DDT @ 15% of Rs. 100 = Rs. 15
Tax payable u/s 115-O is Rs. 15
Dividend distributed to shareholders = Rs. 85
It will take effect from 1st October, 2014
Long-term Capital Gains on debt oriented Mutual Fund
According to the existing provisions short-term capital asset means a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer. However, in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India or a unit of a Mutual Fund or a zero coupon bond, the period of holding for qualifying it as short-term capital asset is not more than twelve months.
The shorter period of holding of not more than twelve months for consideration as short-term capital asset was introduced for encouraging investment on stock market where prices of the securities are market determined. Now it is proposed that an unlisted security and a unit of a mutual fund (other than an equity oriented mutual fund) shall be a short-term capital asset if it is held for not more than thirty-six months.
These amendments will take effect from 1st April, 2015 and will accordingly apply, in relation to the assessment year 2015-16 and subsequent assessment years.
Tax on long-term capital gains on units
According to existing provisions where tax payable on long-term capital gains arising on transfer of a capital asset, being listed securities or unit or zero coupon bond exceeds ten per cent. of the amount of capital gains before allowing for indexation adjustment, then such excess shall be ignored. As long-term capital gains is not chargeable to tax in the case of transfer of a unit of an equity oriented fund which is liable to securities transaction tax.
It is proposed to amend the provisions to allow the concessional rate of tax of ten per cent. on long term capital gain to listed securities (other than unit) and zero coupon bonds.
This amendment will take effect from 1st April, 2015 for all redemptions post 10th July 2014 and will accordingly apply, in relation to the assessment year 2015-16 and subsequent assessment years.