Non Resident Indians (NRI) and Persons of Indian Origin (PIO) can invest in a wide variety of Indian Mutual Funds on a full repatriation as well as non-repatriation basis.
However, NRIs are required to comply with all regulatory requirements such as completion of KYC before investing. Also, a few countries such as US and Canada have certain restrictions on investments by NRIs in Mutual Funds without relevant disclosures. Hence, NRIs from these countries must check with their advisor before investing in Indian funds.
NRIs are provided most of the benefits and conveniences of resident Indian investors while investing. They can invest through SIPs, they can switch as per their convenience, they can opt for growth or dividend options and can repatriate the redemption proceeds whenever they want to.
Repatriation
As an NRI, you can invest on either on a repatriation basis or a non-repatriation basis. Repatriation implies that you can transfer your investment capital, dividends and returns out of India. Non-repatriation implies the opposite, that is, your investment capital, dividends and returns cannot be transferred outside India.
You can have three kinds of bank accounts in India. You can open all these three accounts with any bank in India and the accounts can be used to make investments in India.
Non-Resident External Rupee account (NRE account): Funds from an NRE account can be repatriated abroad.
Fully Convertible Non-Resident account (FCNR account): The FCNR account involves a fixed deposit in a foreign currency. Funds from this account can be repatriated abroad. However, this account cannot be used for investing in a foreign currency.
Non-Residential Ordinary account (NRO account): Funds from an NRO account cannot be repatriated abroad.
It must be noted that income and redemption amounts can be repatriated only if you continue being an NRI at the time of repatriation. Also note that you cannot invest in foreign currency; in other words, your investments in Indian mutual funds must be made in Indian rupees.
How to Invest
One of the highlights of Investing in mutual funds is the ease at which you can invest in them. You can invest offline or online. In case you choose to invest offline, it can be done through a common application form. Along with the form, you need to submit a cheque or bank draft for the investment amount; this should be made in the name of the fund in which you are investing. You can send this directly to the mutual fund company or its registrar or have your financial advisor/mutual fund distributor submit it on your behalf.
To invest online, you fill in the form online, which is available on the mutual fund company’s website, mutual fund distributor’s website and other platforms offered by Fintech companies. However, you must do your homework before choosing one of these options.
In both cases, offline and online investing, you must have completed your Know Your Customer (KYC) and Foreign Account Tax Compliance Act (FATCA) requirements.
KYC
WHAT IS KYC?
KYC is an acronym for “Know Your Customer” and is a term used for Customer Identification Process as a part of Account Opening process with any financial entity. KYC establishes an investor’s identity & address through relevant supporting documents such as prescribed photo id (e.g., PAN card) and address proof and In-Person Verification (IPV). KYC compliance is mandatory under the Prevention of Money Laundering Act, 2002 and Rules framed there under, read with the SEBI Master Circular on Anti Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries.
A standard Account Opening form (AOF) is generally divided in 2 parts:
- Part I contains the basic and uniform KYC details of the investor as prescribed by the Central KYC registry (Uniform KYC) to be used by all registered financial intermediaries and
- Part II additional KYC information as may be sought separately by the financial intermediary such as a mutual fund, stock broker, depository participant opening the investor’s account (Additional KYC).
WHAT IS CENTRAL KYC REGISTRY?
Central KYC Registry (CKYCR) is a centralized repository of KYC records of customers in the financial sector through an entity substantially owned and controlled by Central Government to receive, store and safeguard the KYC records of a client in digital form. This is to implement uniform KYC norms and inter-usability of the KYC records across entities in the financial sector with an objective to reduce the burden of producing KYC documents and getting those verified every time when the customer creates a new relationship with a entity.
Government of India has authorised the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), to act as, and to perform the functions of the Central KYC Registry.
IS UNIFORM KYC COMPLIANCE MANDATORY/COMPULSORY? TO WHOM IS IT APPLICABLE?
Currently, Uniform KYC compliance is mandatory for ALL prospective Individual customers / investors, who wish to open an account with a mutual fund, irrespective of the amount of investment. The effective date for non- individual including shall be announced later.
WHY UNIFORM KYC AND HOW DOES IT BENEFIT INVESTORS?
Uniform KYC has been prescribed in order to bring uniformity in KYC process and eliminate the requirement for investors to undergo the KYC process multiple times when opening accounts with different financial intermediaries like mutual funds, stock brokers, depository participants etc. The CKYCR has prescribed uniform KYC guidelines and a standard KYC form and the supporting documents to be obtained by all registered financial intermediaries. Financial intermediaries shall use this standard KYC form as Part I of their Account Opening Form. The financial intermediary, as part of their account opening process, shall upload the KYC information contained in Part I and documents with CKYCR.
Thus, an investor has to undergo a Uniform KYC process only once and the KYC details are shared by the CKYCR with other financial intermediaries with whom the investor may open accounts subsequently. However, any changes in the KYC information provided earlier need to be updated with any of the intermediaries with whom the investor is maintaining an account.
WHAT IF TWO OR MORE PERSONS WISH TO JOINTLY INVEST IN A SINGLE FOLIO / ACCOUNT?
In case of joint holders in a folio/account, each holder needs to complete the KYC process individually using separate KYC forms.
WHAT ABOUT A MINOR?
In case of investments in respect of a minor, the Parent/Legal Guardian who opens the account on for the minor needs to complete the KYC process. Please refer the Section on Investment on behalf of minors / Change of Guardian & Change in Status on Minor attaining Majority for further details.
WHAT SHOULD BE DONE, WHEN A MINOR BECOMES A MAJOR?
When a minor becomes a major on attaining 18 years of age, she/he has to undergo and complete KYC process in his/her own capacity and notify each of the concerned Mutual Funds/Financial Intermediaries by filling up a prescribed ‘Minor Attaining Majority form’ in order to be able to transact further in his/her folios/accounts. Please refer the Section on Investment on behalf of minors / Change of Guardian & Change in Status on Minor attaining Majority for further details.
WHAT ABOUT A POWER OF ATTORNEY (POA) HOLDER?
To be able to make investments in mutual funds under a POA, the Client i.e. the issuer of Power of Attorney as well as the Constituted Attorney (i.e., the POA holder) have to complete the KYC process in their individual capacity
WHAT ABOUT A LEGAL HEIR OR A NOMINEE, APPLYING FOR TRANSMISSION OF UNITS/PROCEEDS THEREOF, UPON DEATH OF A SOLE UNIT HOLDER / ALL JOINT HOLDERS?
For transmission of units or settlement of proceeds thereof upon death of a sole unit holder or all joint holders, the claimant, i.e., the nominee or the legal heir or the Executor to the Will of the deceased unit holder, as the case be, needs to complete the KYC process in her/his individual capacity in order to get the securities/units transmitted in his/her folio/account.
I WISH TO START AN SIP OF JUST RS.500 PER MONTH. DO I NEED TO FULFIL THE UNIFORM KYC PROCESS?
Yes. KYC is mandatory irrespective of the amount of investment in a mutual fund – whether through lump-sum investment or via Systematic Investment Plan (SIP)/ Systematic Transfer Plan (STP)/ Dividend Transfer Plan (DTP) and Switch transactions etc.
I HAVE SOME UNITS OF PRE-KYC ERA. I WISH TO REDEEM THEM. DO I HAVE TO UNDERGO THE UNIFORM KYC PROCESS?
Yes, if you wish to redeem units of pre-KYC era, you will need to complete the KYC process and submit your PAN.
WHAT SHOULD I DO TO COMPLETE THE UNIFORM KYC PROCESS? WHOM SHOULD I APPROACH?
The duly completed KYC form along with supporting documents such as proof of identity and proof of address and the Account Opening Form may be submitted at any of the Points of Service (POS)/Investor Service Centre (ISC) of any mutual fund. The In Person Verification (IPV) also needs to be completed and certified by an authorised person on the KYC form itself. Your distributor/financial advisor will be able to assist you in this regard.
WHAT SUPPORTING DOCUMENTS DO I NEED TO SUBMIT TO COMPLETE THE KYC PROCESS?
The list of documents which could be submitted towards proof of identity and proof of address is printed on the KYC form.
ARE THE SUPPORTING DOCUMENTS REQUIRED TO BE ATTESTED? IF YES, BY WHOM?
Yes. All supporting documents submitted with the KYC form must be certified i.e., attested by an appropriate authority as per instructions printed on the KYC form. Alternatively, one may submit self-attested photocopies of the supporting documents at the POS. In such a case, one must carry the original documents for being verified by the officials of the POS, who will return the original documents across the counter, after verification.
WHO IS AUTHORISED TO DO IPV?
In case of mutual funds, the IPV can be performed by an authorised official of a mutual fund, AMFI registered Distributor or an authorised officer of a Scheduled Commercial Bank.
WHAT PROOF DO I NEED TO SUBMIT TO A MUTUAL FUND FOR HAVING FULFILLED THE UNIFORM KYC PROCESS, WHILE INVESTING?
You will be allotted a 14-digit unique identification number by CKYCR which should be quoted at the time of opening an account with any financial intermediary.
ARE THERE ANY ADDITIONAL REQUIREMENTS FOR AN NRI TO BE UNIFORM KYC COMPLIANT?
Yes. In addition to a certified true copy of the passport, a certified true copy of proof of the overseas address and permanent address is also required. If any of the documents (including attestations/certifications) towards proof of identity or proof of address is in a foreign language, the same will need to be translated into English before submission. The supporting documents can be attested by the Indian Consulate or overseas branches of scheduled commercial banks registered in India.
IS THERE ANY SPECIAL REQUIREMENT FOR A PIO (PERSON OF INDIAN ORIGIN)?
The requirements applicable to an NRI as explained above, are also applicable to a PIO. However, a PIO is additionally required to submit a certified true copy of the PIO Card.
I HAD COMPLETED KYC COMPLIANCE BEFORE THE INTRODUCTION OF CKYCR REGIME. DO I NEED TO UNDERGO THE UNIFORM KYC ONCE AGAIN WITH ANY FINANCIAL ENTITY?
If you had undergone KYC process before the introduction of Uniform Centralised KYC by CKYCR, you will need to provide certain ‘additional KYC information’ as and when you open a new account with any mutual fund. It is however, advisable to complete the Uniform KYC process immediately.
SECTION II – ADDITIONAL KYC
WHY AM I BEING ASKED TO PROVIDE ADDITIONAL KYC INFORMATION TO EACH AND EVERY MUTUAL FUND IN ADDITION TO COMPLETING THE KYC WITH A KRA/CKYCR??
As explained under Q 1 above, in order to comply with the second stage of the KYC process (Additional KYC), the customer needs to furnish additional KYC Information as required under Prevention of Money Laundering Act to each mutual fund, as part of Account Opening process, as the same is not included in the basic KYC information registered with the KRAs/CKYCR.
WHAT IS THE ‘ADDITIONAL KYC INFORMATION’ THAT I NEED TO PROVIDE?
In case of Individuals, the additional details to be provided are:
- Gross Annual Income details
- Occupation Details
- Politically exposed Person status
- Addresses in other jurisdictions other than India, where the customer has tax residency
In case of Non-Individuals, the entire KYC process needs to be done afresh, due to significant changes in KYC requirements
WHY DO I NEED TO GIVE MY INCOME DETAILS? HOW CAN I BE SURE THAT IT WILL NOT BE MISUSED?
As per PMLA, it is mandatory for all SEBI registered intermediaries (including mutual funds) to obtain financial status details from its investors. Please note that this information is sought in the form of income slabs (and not a specific figure) and no proof of income is required. The information given by you in the Account Opening Form (AoF) will be treated in a confidential manner and used for regulatory purposes only, if called for.
DO I NEED TO INFORM ABOUT MY CHANGE OF INCOME STATUS?
Yes. If you have an increase or a decrease in your income, which would effectively change the income bracket or the net worth that you have previously declared, you should inform the mutual funds with whom you hold an account/folio. No proof is needed. In fact, you need to update if there is a change in any of the additional KYC information previously submitted.
HOW DO I PROVIDE / UPDATE THE ‘ADDITIONAL’ KYC INFORMATION?
For Individuals, a ‘KYC Change Request form’ may be submitted. In case of Non-Individuals, the entire KYC process needs to be done afresh, due to significant and major changes in KYC requirements. Duly filled KYC Change Request form or a complete Non-individual form can be submitted to any of the POS/ISCs of any Mutual Fund.
IS THERE ANY TIMELINE FOR PROVIDING THE ‘MISSING’ KYC INFORMATION?
You may provide the additional/missing KYC information at the time of –
- opening of a new account/folio with a mutual fund or
- updation of any KYC information, such as address, provided earlier.
SECTION III – ULTIMATE BENEFICIAL OWNER (UBO)
WHAT IS A UBO?
UBO is an acronym for Ultimate Beneficial Owner. A UBO is the is the natural person or persons, who ultimately owns, controls or influences a customer and/or persons on whose behalf a transaction is being conducted, and includes a person who exercises ultimate effective control over a legal person or arrangement. In terms of SEBI Circular CIR/MIRSD/2/2013 dated January 24, 2013, all intermediaries are required to identify the beneficial owners of their clients and take reasonable measures to verify the identity of such persons.
WHO HAS TO PROVIDE DETAILS OF UBO?
All non – individuals investors are required to provide details of the UBO(s)
IS ANY ENTITY EXEMPTED FROM PROVIDING THE UBO DETAILS?
Yes. In case the client entity is a company listed on a stock exchange or is a majority owned subsidiary of such a company, the details of shareholders or beneficial owners are not required to be provided. However, such a company/entity has to submit an appropriate declaration.
WHAT IS THE PURPOSE OF IDENTIFYING AN ULTIMATE BENEFICIAL OWNER?
The Prevention of Money Laundering Rules, 2005 inter- alia mandates that every intermediary shall identify the beneficial owner and take all reasonable steps to verify his identity. SEBI Circular CIR/MIRSD/2/2013 dated January 24, 2013 has prescribed a uniform approach to the securities market towards determination of beneficial ownership. The term reflects a recognition that a person in whose name the investments are held may not necessarily be the person who ultimately controls such investments or who is ultimately entitled to such investments.
WHO CAN SIGN THE UBO DECLARATION FORM?
Only persons authorized to represent a company or entity in accordance with its constitution/ resolutions may complete and sign the UBO declaration form.
HOW IS THE IDENTITY OF THE ULTIMATE BENEFICIAL OWNER DETERMINED?
The identity of the UBO can be ascertained from the following information:
- For investments of non-individuals (other than trusts) viz., company, partnership or unincorporated association/body of individuals, the identity of the natural person, who, whether acting alone or together, or through one or more juridical person, exercises control through ownership or who ultimately has a controlling ownership interest. Here controlling ownership interest means ownership of/entitlement to:
- more than 25% of shares or capital or profits of the juridical person, where the juridical person is a company;
- more than 15% of the capital or profits of the juridical person, where the juridical Person is a partnership; or
- more than 15% of the property or capital or profits of the juridical person, where the juridical person is an unincorporated association or body of individuals.
Where there exists doubt as to whether the person with the controlling ownership interest is the beneficial owner or where no natural person exerts control through ownership interests, the identity of the natural person exercising control over the juridical person through other means such as through voting rights, agreement, arrangements or in any other manner.
Where no natural person is identified under above clauses the identity of the relevant natural person who holds the position of senior managing official shall be declared as the UBO.
WHO IS CONSIDERED THE UBO IN CASE OF A TRUST?
The identity of the settlor of the Trust, the trustee, the protector, the beneficiaries with 15% or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership.
HOW CAN I REGISTER THE UBO?
You can register the UBO details by filling up the prescribed ‘Declaration of Ultimate Beneficial Ownership’ Form and submitting the same to the nearest ISC or POS of the Mutual Fund or its Registrar or MFU POS.
FATCA
The FATCA law was initiated by the US and requires mutual funds to report financial transactions of US persons to the relevant tax authorities. FATCA applies to you if you are a tax resident of the US.
To comply with FATCA, you must provide information which includes country of tax residence, tax identification number from such country, country of birth and country of citizenship, among other details.
FATCA was initiated to prevent US persons from avoiding US taxation on their income and assets.
TAXATION
Tax Regime Specific to Mutual Fund Investors in India
Applicable for the Financial Year 2023-24
I. Tax Rates for Mutual Fund Investors
| EQUITY ORIENTED FUNDS (Subject to STT3) | |||||
| Tax Status of Investor | Capital Gains Tax10 | Tax on Distributed Income under Dividend Option | TDS on Capital Gains6,7 | TDS6,7 on Distributed Income Dividend Option | |
| Short Term | Long Term | ||||
| Resident Individual / HUF / AOP / BOI / | 15% | 10%$12 | At the applicable Tax slab rate | NIL | 10%9 |
| Domestic Companies | |||||
| N R I s4 | STCG – 15% LTCG – 10%$12 | 20%2 | |||
| OTHER THAN EQUITY ORIENTED FUNDS | |||||
| Tax Status of Investor | Capital Gains Tax11 | Tax on Distributed Income under IDCW@ Option | TDS on Capital Gains6,7 | TDS6,7 on Distributed Income under IDCW@ Option | |
| Short Term | Long Term | ||||
| Resident Individual / | At the applicable Tax slab rate | 20%* | At the applicable Tax slab rate | NIL | 10%9 |
| HUF / AOP / BOI / | |||||
| Domestic Companies / Firms | 15%13/ 22%14/ 25%15/ 30% | ||||
| N R I s4 | At the applicable Tax slab rate | • 20*(Listed Units) • 10%$5(Unlisted Units) | At the applicable Tax slab rate | STCG – 30% LTCG – • 20*(Listed Units) • 10%$5(Unlisted Units)5 | 20%2 |
*With indexation $Without indexation@IDCW = Income Distribution cum Capital Withdrawal
Tax & TDS are subject to applicable Surcharge and Health & Education Cess at the rate of 4%. Please see the Notes below
NOTES:
- Provided that the mutual fund units are held as capital assets.
- Tax to be deducted at source at the rate of 20% [plus applicable surcharge, if any, and Health and Education Cess @ 4% on income-tax and surcharge] or at the rate specified under the relevant double tax avoidance agreement, whichever is lower as per section 196A of the Income tax Act, 1961 (‘the Act’).
- Securities Transaction Tax (‘STT’) is applicable only in respect of sale of units of Equity-oriented funds (EOFs) on a recognised stock exchange and on repurchase (redemption) of units of EOFs by the mutual fund. STT in not applicable in respect of purchase/ sale/ redemption of units of other schemes (other than EOFs).
- Non-resident individuals (NRI) shall be entitled to be governed by provisions of the applicable Tax Treaty, which India has entered with the country of residence of the NRI, if that is more beneficial than the provisions of the Act , subject to certain conditions. As per section 90(4) of the Act, a non-resident shall not be entitled to claim treaty benefits, unless the non-resident obtains a Tax Residency Certificate of being a resident of home country. Furthermore, as per section 90(5) of the Act, non-resident is also required to provide such other documents and information, as prescribed by CBDT, as applicable.
- As per section 112 of the Act, long-term capital gains in case of NRIs would be taxable @ 10% on transfer of capital assets, being unlisted securities, computed without giving effect to first and second proviso to section 48 i.e., without taking benefit of foreign currency fluctuation and indexation benefit.
- Relaxation to NRIs from deduction of tax at higher rate (except income distributed by mutual fund) in the absence of Permanent Account Number (PAN) is subject to the NRI providing specified information and documents. As per provisions of Section 206AA of the Act, if there is default on the part of a NRI (entitled to receive redemption proceeds from the Mutual Fund on which tax is deductible under Chapter XVII of the Act) to provide its PAN, the tax shall be deducted at higher of the following rates: i) rates specified in relevant provisions of the Act; or ii) rate or rates in force; or iii) rate of 20%. However, the provisions of section 206AA of the Act shall not apply, if the requirements as stated in Rule 37BC of the Income-tax Rules, 1962, are met.
- Section 206AB of the Act provides for higher rate for TDS for the non-filers of income-tax return. The TDS rate in this section is higher of the following rates: i) twice the rate specified in the relevant provision of the Act; or ii) twice the rate or rates in force; or iii) the rate of five per cent. However, the said provision does not apply to a non-resident who does not have a permanent establishment in India and a person who is not required to furnish the return of income for the assessment year relevant to the said previous year and is notified by the Central Government in the Official Gazette in this behalf.
- Surcharge Rate as a percentage of Income-tax
Tax Status Income < ₹50 lakh Income > ₹50 lakh but < /= ₹1 crore Income > ₹1 crore but < /= ₹2 crore Income > ₹2 crore but < /= ₹5 crore Income > ₹5 crore Individual / HUF/ AOP (resident & foreign)* NIL 10% 15% 25% 37% Tax Status Income < /= ₹1 crore Income > ₹1 crore, but < /= ₹10 crore Income > ₹10 crore – – Partnership Firm (Domestic / foreign) NIL 12% 12% – – Domestic company NIL 7% 12% – – Domestic company (opting for new tax regime) NIL 10% 10% – – Foreign company NIL 2% 5% – – In addition, “Health and Education Cess” @ 4% shall be applicable on aggregate of base tax and surcharge.
* The surcharge rate applicable to capital gains taxable under section 112, 112A and 111A of the Act is capped to 15%.
*In case investor is opting for ‘New Tax Regime’ under section 115BAC (1A) of the Act , the rate of surcharge is capped at 25%.
** The surcharge rates in the case of an association of persons consisting of only companies as its members as under —Particulars Rate Income > ₹50 lakh but <= ₹1 crore 10% Income > ₹1 crore 15% - There shall be no TDS deductible if dividend income paid / credited in respect of units of a mutual fund is below ₹ 5,000 in a financial year.
- Capital gains arising on the transfer or redemption of equity-oriented units held for a period of more than 12 months, immediately preceding the date of transfer, should be regarded as ‘long-term capital gains’.
Finance Act 2023 has introduced section 50AA which provides that any gains on transfer / redemption of units of specified mutual funds acquired on or after 1 April 2023 are deemed as short-term capital gains. For the purposes of section 50AA, “specified mutual fund” means a mutual fund by whatever name called, where not more than 35% of its total proceeds is invested in the equity shares of domestic companies.
An “equity-oriented fund” which invests in units of another fund instead of investing directly in equity shares of domestic company may be regarded as “specified mutual fund” as per section 50AA of the Act and taxed accordingly. - Capital gains arising on transfer or redemption of Units of schemes other than EOF and other than specified mutual fund as per section 50AA of the Act shall be regarded as long-term capital gains, if such units are held for a period of more than 36 months immediately preceding the date of such transfer.
- As per section 112A of the Act, long-term capital gains on transfer of units of EOFs exceeding ₹ 100,000 shall be taxable @10% provided transfer of such units is subject to STT, without giving effect to first and second proviso to section 48 i.e., without taking benefit of foreign currency fluctuation and indexation benefit. Further, cost of acquisition to compute long-term capital gains is to be higher of (a) Actual cost of acquisition; and (b) Lower of (i) fair market value as on 31 January 2018; and (ii) full value of consideration received upon transfer.
- If a company decides to opt for the new taxation regime as per the Taxation Law Amendment Act, 2019, then tax shall be levied at the rate of 22%. i.e., the lower rate of 22% is optional and subject to fulfilment of certain conditions as provided in section 115BAA.
- The first proviso to Section 115BAB provides that any income which is not derived from nor is incidental to manufacturing or production of an article/ thing and in respect of which no specific tax rate is specified under Chapter XII of the Act, would be taxable at 22% and no deduction would be allowed while computing such income.
- Tax shall be levied @ 25%, if the total turnover or gross receipts of the financial year 2021-22 does not exceed ₹ 400 crores. Further, the domestic companies are subject to minimum alternate tax (except for those who opt for lower rate of tax of 22%) not specified in above tax rates.
- Securities Transaction Tax (STT) in respect of Units equity-oriented mutual fund Schemes
Transaction Rates Payable by Purchase of units of equity-oriented mutual fund Nil Not Appliable Sale of units of equity-oriented mutual fund (delivery based) 0.001% Seller Sale of units of equity-oriented mutual fund (non-delivery based) 0.025% Seller Sale of units of an equity-oriented fund to the Mutual Fund 0.001% Seller - Various Categories of MF Schemes which fall under “Other than Equity Oriented Funds”:
- Liquid Funds /Money Market Funds / Income Funds (Debt Funds) / Gilt Funds
- Hybrid Fund (Equity exposure < 65%)
- Gold ETFs / Bond ETF / Liquid ETF
- Fund Of Funds (Domestic) other than Fund of funds as defined under the “Equity Oriented Fund” definition under section 112A of the Act
- Fund Of Funds Investing Overseas
- Infrastructure Debt Funds
- Specified mutual funds as defined under section 50AA of the Act
II. OTHER TAX PROVISIONS
- Capital gains arising on Transfer of units upon consolidation of mutual fund schemes of two or more schemes of EOFs or two or more schemes of a Scheme other than EOF in accordance with SEBI (Mutual Funds) Regulations, 1996 is exempt from capital gains tax.
- Likewise, Capital gains arising on Transfer of units upon consolidation of Plans within a mutual fund scheme in accordance with SEBI (Mutual Funds) Regulations, 1996 is exempt from capital gains tax.
- Currently, switching units of mutual fund within the same scheme from Growth Plan to Dividend Plan and vice-versa is subject to capital gains tax.
- Creation of segregated portfolio: SEBI has permitted creation of segregated portfolio of debt and money market instruments by mutual fund schemes in certain situations. As per the said SEBI circular, all existing unit holders in the affected mutual fund scheme as on the date of the credit event shall be allotted equal number of units in the segregated portfolio as held in the main portfolio. As per sub-sections (2AG) and (2AH) to Section 49 of the Act, cost of acquisition of a unit or units in a segregated portfolio shall be the amount which bears to the cost of acquisition of a unit or units held by the assessee in the total portfolio in the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios. Further, the cost of acquisition of the original units held by the unit holder in the main portfolio shall be reduced by the amount as so arrived for the units of segregated portfolio.
- An Equity Oriented Mutual Fund has been defined in section 112A of the Act. As per the said definition, a fund of fund scheme structure shall be treated as an Equity Oriented Fund if:
- a minimum of ninety per cent of the total proceeds of such fund is invested in the units of such other fund; and
- such other fund also invests a minimum of ninety per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange
Thus, if a fund invests in units of other funds and fulfills the aforementioned criteria, then it shall be regarded as Equity Oriented Fund. However, if the aforementioned conditions are not fulfilled, then the same shall be regarded as other than Equity Oriented Fund and subjected to the same tax treatment as applicable to a non-equity-oriented fund.
However, section 50AA of the Act deems any gains on transfer / redemption of units of specified mutual funds acquired on or after 1 April 2023 as short-term capital gains. For the purposes of section 50AA, “specified mutual fund” means a mutual fund by whatever name called, where not more than 35% of its total proceeds is invested in the equity shares of domestic companies. Accordingly, an “equity-oriented fund” which invests in units of another fund instead of investing directly in equity shares of domestic company may be regarded as “specified mutual fund” as per section 50AA of the Act and taxed accordingly. - Bonus Stripping: As per Section 94(8), the loss due to sale of original units in the schemes, where bonus units are issued, will not be available for set off; if original units are: (A) bought within three months prior to the record date fixed for allotment of bonus units; and (B) sold within nine months after the record date fixed for allotment of bonus units. However, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such unsold bonus units held on the date of transfer of original units. The provision of this sub section are also applicable to securities. Further, the definitions of the terms “unit” and “record date” also include the units of business trusts (i.e. Real Estate Investment Trusts [REITs]/ Infrastructure Investment Trusts [InvITs]) and units of Alternate Investment Funds in the ambit of the said section.
| DISCLAIMER The above information is provided for basic guidance for investments in mutual funds and is based on provisions of the Income-tax Act, 1961, as sought to be amended by the Finance Act, 2023. The tax implications may vary for each assessee based on the details of his income. All rates and figures appearing are for illustrative purposes only. Tax benefits are subject to change in tax laws. Contents of this note have been drawn for informative purpose only and it is neither a complete disclosure of every material fact of Income-tax Act, 1961 nor does it constitute tax or legal advice. The AMC/Trustee/ Sponsor accept no liability whatsoever for any direct or consequential loss arising from any information provided in this note. Investors are advised to consult their tax advisor before taking any investment decision. |