Given the confusion that has prevailed over the taxation of investments and particularly with regard to mutual fund investments, we can understand the confusion in your mind. In fact it would be correct to state, in all fairness, that a substantial amount of confusion still prevails. However, we will try to lay out for you the taxation proposals as they currently stand.
Post-budget and the subsequent clarification on July 21, units of equity-oriented mutual funds will be treated at par with equities for purposes of taxation. This means that you will have to pay a 0.075 per cent transaction tax on the purchase as well as sale of your mutual fund units.
That is the bad news. The good news is that you will be eligible for the tax breaks that have been extended to those investing directly into equity markets.
So, if you make a gain on your equity-oriented mutual fund investments and book this profit a year after the date of purchase, your profits will not be subjected to any long-term capital gains tax. However, if you book this profit within a year itself, you will be subjected to a short-term capital gains tax of 10 per cent. Compare this to the earlier situation when it would have been treated as part of your overall income and depending on which tax bracket you belonged to, you would have had to pay the capital gains tax. This provision will prove to be particularly beneficial for those in the high income-tax brackets.
This is as far as taxation of investments in equity-oriented mutual fund units is concerned. If, on the other hand, you hold units of debt-oriented mutual funds then you are not eligible for the tax-breaks on capital gains and in a quid pro quo arrangement will not have to pay the transaction tax on your investments. Moreover, for individuals and HUFs, the dividend distribution tax remains unchanged at 12.5 per cent. However, for all other entities it has been increased to 20 per cent.
This in short is the tax maze that has been woven around you. However, we would like to reiterate once again that you must stick to your regular investing habit because in the long-term such short-term events lose significance and those with a definite investment philosophy and a regular saving and investing habit stand to gain substantially.
This article was originally published on October 12, 2004.
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