What is Capital Gain?

A capital gain is a profit that results from investments in capital assets which exceeds the purchase price.

How is Capital Gain Calculated?

Sales Amount 1,00,000

(-) Sales Expense

5,000

95,000

Less:

Purchase Amount

50,000

(+) Purchase Expense

5,000

55,000

Capital Gain/ Loss

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40,000

How is Tax on Capital Gains calculated?

Capital Assets Short term capital Gain/Loss Long Term capital Gain/Loss Tax Slab Short Term - 15% on capital gain Shares With in 1 year (365 days) More than 1 year Long Term - Fully Exempted (Listed Shares) Short Term:

1. Equity fund - 15% 2. Debt fund - Add capital gain to normal inc 3. Liquid fund - 15% Mutual Fund With in 1 year (365 days) More than 1 year Long Term:

1. Equity fund - Fully Exempted (Listed funds 2. Debt fund - 15 % 3. Liquid fund - 22% Short Term - 15% on capital gain House Property Less than 3 years More than 3 years gain (which ever is less)

Long Term - With indexation 20%, without in

Short Term - 15% on capital gain Land & Building Less than 3 years More than 3 years

Long Term - With index 20%, without indexa (which ever is less) Short Term - 15% on capital gain Plant & Machinery Less than 3 years More than 3 years gain (which ever is less) Short Term - 15% on capital gain Precious Jewellery Less then 3 years More than 3 years

Long Term - With indexation 20%, without in

Long Term - With indexation 20%, without in gain (which ever is less)
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What are all the documents I am supposed to present while calculating tax on Capital Gains?
1. 2. 3.
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For Shares, we need Capital Gain Statement (or) Transaction Statement. Mutual Funds, Account Statement. For Land& Buildings, House Property & Plant & Machinery, produce supporting documents ( sale deed & purchase deed)

What if I fail to pay Tax on Capital Gains?

If you fail to pay your Tax on Capital gain or, if you pay less than the stipulated tax, you would be penalized and would have to pay extra under Sections 234A, 234B, 234C. And also to avoid demand from Income Tax Department.
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How can I reduce Tax on Capital Gains ?

Capital Gains Tax can be reduced if one of the following Sections can be applicable. S.no Description Section

Reinvestment in house property

54

Reinvestedin Agricultural land

54B

Reinvested in purchase of another land or building

54D

Investment in bonds issued by national highway authority of India or National Rural Electrification corporation Ltd Investment in house property

54F

54F

Reinvestment in purchase of new machinery or plan Invested within specified time frame to set up an industrial unit in a specific Economic Zone

54G

54GA

Mutual Fund Taxation in India

by HEMANT BENI WAL on DECEMBER 2, 2011

There are very few things in this world which are both Legal & Lethal. TAX is one of them. If not understood or paid in a proper way, it is enough to give you hypertension which is one of the most common reasons for a heart stroke. See, I made you look gloomy and stressful. Hence it is very important to have elementary knowledge of Tax Provisions.

I believe most of the readers are new to the Mutual Funds so they will have many queries on taxation of Mutual Funds. So, here is an attempt to

cover Mutual Fund Taxation for individuals, HUF & NRIs. Income from Mutual Fund can be divided into 2 parts Capital Gain (increase in value of your investment) or dividends that investors receive on regular intervals if they have opted for dividend plans. So taxation of Mutual Funds in India can be divided in 2 parts Capital Gain & Dividends.

Capital Gain Taxation on Mutual Funds

Capital Gain is appreciation in the value of asset if you buy something for Rs 1 Lakh & sell it for Rs 1.5 Lakh, you have made a Capital Gain of Rs 50000. Capital Gains are further divided into short term & long term depending on their investment horizon. Short term capital Gain arises if investment is hold for less than 1 year or in simple words sold before completion of 1 year. Here 1 year means 365 Days. Long Term Capital Gain arises if investment is sold after 1 year. Mutual Fund Capital Gain Tax further depends on which type of fund it is Equity or Debt. Capital Gain Tax on Equity Mutual Funds Equity Mutual Funds are those funds where equity holding is more than 65% of the total portfolio so even balanced funds will be categorized in Equity Funds. Fund of Funds (mutual funds which invests in other funds) & international funds (funds which have more than 35% exposure to international equities) will be kept under debt category for tax purpose.

Long Term Capital gain on Equity Mutual Funds if you buy & hold an equity Mutual Fund for more than 1 year, there will be NIL Tax. Eg. If you invest Rs 1 lakh in XYZ Fund & after 1 year, its value is Rs 1.3 Lakh there will be zero tax on capital appreciation of Rs 30000. This is a very big advantage of equity mutual funds. Short Term Capital gain on Equity Mutual Funds if you sell equity mutual fund before completion of 1 year you need to pay tax of 15% on capital gains. In the above example where gain was Rs 30000 if this was a short term capital gain, investor would have paid Rs 4500 as short term Capital Gain. Note for NRIs Same capital gain is applied for NRIs but in case of Short Term Capital Gain there will be a TDS (tax deducted at source). Which means Tax will be deducted by Mutual Fund Company before paying redemption (sell) amount. Capital Gain Tax on Debt Mutual Funds All other funds which will not qualify as equity fund, including Fund of Fund & international Fund will be part of debt mutual funds. Definition of Short Term & Long Term is same as mentioned in equity category. Short Term Capital gain on Debt Mutual Funds any short term capital gain that arises due to selling of debt fund before 1 year will be added to investors income. Once it is added to income it will be taxed according to tax slab of that individual.

Long Term Capital gain on Debt Mutual Funds here taxation depends on whether investor would like to use indexation or not. (To understand more on indication read this article Taxation on Fixed Maturity Plans. Without Indexation 10% tax on capital gains With Indexation 20% tax on capital sains Note for NRIs NRIs will receive their redemption amount only after tax: Short Term 30% TDS Long Term 20% TDS Cess of 3% will also be applied to this TDS. Shailesh asked couple of questions regarding capital gain taxation on mutual funds hope this will help you to understand the concept better: I know that some short term as well as long term tax need to paid on redemption of mutual fund, but I dont know where to pay and how much to pay.

Can you please take following scenario and help me out to calculate tax? Suppose my salary income is Rs. 8,50,000 per annum, I am in 20% tax slab. Apart from that only mutual fund income is there. 1. I have purchased Equity mutual fund Rs. 10000 on 2004-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year? Ans. Here Long Term Capital Gain on Equity is applied So NIL tax.

2. I have purchased Equity mutual fund Rs. 10000 on 2004-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year? Ans. Here Short Term Capital Gain on Equity is applied So 15% tax on gains or Rs 150. 3. I have purchased Debt mutual fund Rs. 10000 on 2004-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year? Ans. Here Long Term Capital Gain on Debt is applied So 10% tax or Rs 100 (I am assuming that Indexation is not used). 4. I have purchased Debt mutual fund Rs. 10000 on 2004-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year? Ans. Here Short Term Capital Gain on Debt is applied so appreciation of Rs 1000 will be added to your income tax & taxed according to your slab. 5. I have purchased hybrid mutual fund(say HDFC Balanced) Rs. 10000 on 20-04-2010 and sold it on 2010-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year? Ans. As I told you earlier that balanced funds or funds with more than 65% in equities are qualified as Equity Funds so answer will be same as question 1.

6. I have purchased hybrid mutual fund(say HDFC Balanced) Rs. 10000 on 20-04-2011 and sold it on 2010-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year? Ans. Same as Question 2 Hope now you have clear idea about capital gains. Lets see second part of income from mutual fund that is Dividend Income.

Mutual Fund Dividend Taxation

Again this taxation will depend on which type of Mutual Fund you are investing in Equity or Debt. There is no dividend distribution tax on equity mutual funds & also the dividend received by investors is tax free. So, again a bonus for equity mutual fund investors. Even in case of Debt Mutual Funds dividends received by investor are tax free in their hand or they dont need to show it as a taxable income. But there is dividend distribution tax paid by mutual funds to income tax department. Dividend Distribution Tax on Debt Mutual Funds Here there are many tax slabs depending on the investor category but we will only be talking about Individuals, HUF & NRIs. This taxation further depends on type of Debt Funds: Dividend Distribution Tax on Liquid/Money Market Schemes

Liquid/Money Market Schemes means Debt oriented funds which invest in money market instruments or in securities that have maturity of less than 90 days. Here 27.038% tax (25% Tax + 5% Surcharge + 3% Cess) will be deducted from the dividends. Dividend Distribution Tax on Debt Funds other than Liquid/Money Market Schemes Here 13.519% tax (12.5% Tax + 5% Surcharge + 3% Cess) will be deducted from the dividends. In equity mutual funds there is not much whether you invest in a growth or option. (Leaving 2-3 special cases) In debt important that investor should select dividend depending on his time horizon & tax slab. difference dividend it is very or growth

Tip: If you are in higher tax slab & would like to invest for less than one year in debt fund dividend will be a better option. If you still have any query related to Mutual Fund Taxation feel free to ask. If you think this article was helpful to understand this concept, must share it with your friends.
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