I follow Value Research ratings before I make any investment in a mutual fund. I have a query pertaining to taxation of units. Recently I invested in Templeton India Money Market Account (MMA)-Regular. The face value is Re 1 and they declare a bonus every day. Since I am a senior citizen, I would like a monthly income. Should I withdraw part of the bonus units every month? If yes, would they be considered as dividends and hence non taxable? Or, would it be added to my other income making me liable for tax?
-IVLN Chary
Templeton India Money Market Account (MMA)-Regular is a five-star rated debt fund. The fund has delivered returns of 9.27 per cent in the last one year (as on December 19, 2007). When bonus units are allotted to you everyday, the NAV of the fund falls by the same proportion. Under Section 55(2) (AA) of the Income Tax Act, bonus on mutual fund units has a zero (nil) cost of acquisition.
When you sell the units on a monthly basis you have to take note of the date of acquisition and sale of units. The holding period is calculated from the date of allotment of these bonus units. Based on the principle of FIFO (first in, first out), the units you bought first would be sold first (for treatment of tax). So, the net sale proceeds of these units would be treated as short-term capital gains (as units are held for less than a year). This short-term capital gain is to be added to the total income. Your total income, including short-term capital gain, is chargeable to income tax as per the relevant slab rates. The reason it is not treated as a dividend is because the fund house would re-purchase the units from you at your request.
This article was originally published on January 28, 2008.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
