Tax Benefits of Investing in Mutual Funds

As per the taxation laws in force and as per the amendments proposed therein by the Finance Bill, 2005 (“the FB”) the tax benefits that are available to the investors investing in the Units of the Schemes are stated herein below. The information so stated is based on the Mutual Fund’s understanding of such tax laws in force as of the date of this Offer Document, which have been vetted by the tax consultants.

The following information is provided for only general information purposes. In view of the individual nature of tax benefits, each investor is advised to consult with his or her own tax consultant with respect to the specific tax implications arising out of their participation in the scheme.

The following benefits may accrue to the Unit holders with effect from the financial year commencing from April 1, 2005 (unless otherwise stated) subject to the FB being enacted as the Finance Act, 2005

A. INCOME TAX

1. EXEMPTION U/S. 10(35)
   Under the provisions of Section 10(35) of the Act income received in respect of the units of a mutual fund specified u/s. 10(23D) will be exempt from income tax in the hands of all unit holders. In view of this position, no tax needs to be deducted at source from such distribution by the fund. However, by virtue of the proviso to section 10(35), this exemption does not apply to income arising on «transfer» of units of a mutual fund.
   
   
2. LONG TERM CAPITAL GAINS
   
   
   1. On units of equity oriented funds
      Section 10(38) exempts long term capital gains arising from the transfer of units of an equity oriented fund provided the transaction of sale is entered into on or after the date on which the securities transaction tax is made applicable and such transaction is chargeable to the securities transaction tax.
      
      
   2. On units of funds other than the equity oriented funds
      
      
      • For Individuals and Hindu Undivided Families (“HUF”s)
        Long-term capital gains in respect of units held for a period of more than 12 months will be chargeable u/s.112 at the rate of 20% (plus surcharge), as applicable. Capital gains would be computed after reducing the aggregate of cost of acquisition (as adjusted by cost inflation index notified by the Central Government) and expenditure incurred wholly and exclusively in connection with transfer.
        
        An assessee will have an option to apply concessional rate of tax of 10% (plus surcharge) provided the long term capital gains are computed without substituting indexed cost in place of cost of acquisition.
        
        Further, in the case of Individuals and HUFs, being resident, where taxable income as reduced by long-term capital gains, is below the basic exemption limit, the long-term capital gains will be reduced to the extent of the shortfall and only the balance long-term capital gains will be subjected to income tax at 20% (plus surcharge) or 10% (plus surcharge) as the case may be.
        
        
      • For Partnership firms, Indian Companies and other residents
        Long term capital gains will be subjected to the income tax at the rate of 20% (plus surcharge) or 10% (plus surcharge) as the case may be.
        
        
      • For non-residents and foreign companies
        Long term capital gains will be subjected to the income tax at of 20% (plus surcharge). However, no benefit of Cost Inflation Indexation is available.
        
        
      • For non-resident Indians
        Under section 115E of the Act for non-resident Indians, income by way of long term capital gains in respect of Units is chargeable at the rate of 10% (plus surcharge). However, no benefit of Cost Inflation Indexation is available. Non-resident Indians may opt for computation of long-term capital gains as per section 112, if it is more beneficial.
        
        
      • For Overseas Financial Organizations, including Overseas Corporate Bodies fulfilling conditions laid down under section 115AB (Offshore Funds) Under section 115AB of the Act, long term capital gains in respect of units held for a period of more than 12 months
        will be chargeable at the rate of 10% (plus surcharge). Such gains would be calculated without indexation of cost of acquisition.
        
        
      • For Foreign Institutional Investors (“FIIs”)
        Under section 115AD of the Act, long term capital gains in respect of units held for more than 12 months would be taxed at the rate of 10% plus surcharge. Such gains would be calculated without indexation of cost of acquisition. Tax on long term capital gains in all the above cases is proposed to be further increased by the Education Cess (“EC”) calculated @ 2% on tax plus surcharge as per the FB
        
        
3. CAPITAL LOSS
   
   
   • Section 94(7) disallows any capital loss, arising to a unit holder if he acquires units of a mutual fund within a period of three months prior to the record date fixed for declaration of dividend or distribution of income and sells or transfers such units within a period of nine months from such record date, to the extent of dividend or income received or receivable on such units.
     
     
   • Section 94(8) provides that if a person buys or acquires units (“the original units”) of a mutual fund within a period of three months prior to the record date fixed for allotment of bonus units and sells the original units within nine months from the date of allotment of bonus units then the loss arising on such sale or transfer shall be ignored. Further, such loss shall be deemed to be the cost of acquisition or purchase of the bonus units.
     
     
4. SHORT TERM CAPITAL GAINS
   
   
   1. On units of equity oriented funds
      Section 111A provides that the short term capital gains arising from the transfer of units of an equity oriented fund will be taxed at 10% (plus applicable surcharge) provided the transaction of sale is entered into on or after the date on which the securities transaction tax is made applicable and such transaction is chargeable to the securities transaction tax.
      
   2. On units of funds other than equity oriented funds
      
      
   3. Short term Capital Gains in respect of Units held for a period of not more than 12 months is added to the total income. Total income including short-term capital gains is chargeable to tax as per the relevant slab rates.
      
      The maximum tax rates applicable to different categories of assesses are as follows:
      
      Resident Individuals and HUF 30% plus surcharge, as applicable.
      Partnership Firms 30% plus surcharge
      Indian companies 30% plus surcharge
      Non Resident Indians 30% plus surcharge
      Foreign Companies 40% plus surcharge
      Overseas financial Organisations 30% plus surcharge
      FIIs 30% plus surcharge
      
      Tax on short term capital gains in all the above cases will be further increased by the EC calculated @ 2% on tax plus
      surcharge as per the FB
      
      
5. TAX DEDUCTION AT SOURCE ON CAPITAL GAINS
   
   
   1. No tax is required to be deducted at source on capital gains arising to any resident unit holder.
      
      
   2. Under section 195 of Act, tax shall be deducted at source in respect of capital gains as under:
      
      

      • a. In case of a non-resident other than a company -
        Long term capital gains on units of equity oriented funds nil
        Long term capital gains on units of funds other than equity oriented funds 20% plus surcharge Short term capital gains on units of equity oriented funds 10% plus surcharge
        Short term capital gains on units of funds other than equity oriented funds 30% plus surcharge
        
        
      • b. In case of a foreign company -
        Long term capital gains on units of equity oriented funds nil
        Long term capital gains on units of funds other than equity oriented funds 20% plus surcharge Short term capital gains on units of equity oriented funds 10% plus surcharge
        Short term capital gains on units of funds other than equity oriented funds 40% plus surcharge
        
        Tax Deducted At Source on short term and long term capital gains in all the above cases is proposed to be further increased
        
        
   3. Under section 196B of the Act tax at 10% plus surcharge and EC calculated @ 2% on tax plus surcharge as per the FB shall be deducted at source from long term capital gains on units other than the units of equity-oriented mutual funds earned by Overseas Financial Organisation.
      
      
   4. Under Section 196D of the Act, no deduction shall be made from any income by way of capital gains, in respect of transfer of securities referred to in Section 115AD of the Act. As per circular no. 728 dated October 1995 by CBDT, in the case of a remittance to a country with which a Double Taxation Avoidance Agreement (DTAA) is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in DTAA whichever is more beneficial to the assessee. In order for the unit holder to obtain the benefit of a lower rate under the DTAA, the unit holder would be required to provide the fund with a certificate obtained from his Assessing Officer stating his eligibility for the lower rate.
      
      
6. INVESTMENTS BY CHARITABLE AND RELIGIOUS TRUSTS
   
   
   1. Units of Mutual Fund Schemes referred to in clause 23D of section 10 of the Act constitute an eligible avenue for investment by charitable or religious trusts per rule 17C of the Income Tax Rules, 1962, read with clause (xii) of subsection (5) of section 11 of the Income Tax Act, 1961.
      

B. WEALTH TAX

Units held under the Schemes of Mutual Fund are not treated as assets within the meaning of section 2(ea) of the Wealth

Tax Act, 1957 and are, therefore, not liable to Wealth-Tax.

C. GIFT TAX

If units of Mutual Fund Scheme are gifted, no gift tax shall be payable either by the donor or the donee as the Gift Tax has been abolished. Notes to tax benefits

1. All tax benefits will be available to the Sole Unit holder or the first named holder in case the Units are held in the names of more than one person, as the case may be.
   
   
2. HSBC AMC also confirms that the Income Tax/Wealth Tax/Capital Gains Tax and investment by NRIs/FIIs/OCBs are subject to relevant requirements under the Income Tax, FEMA and RBI Directions.
   
   
3. As per Section 54ED capital gains arising from transfer of a long term capital asset being listed securities or units of UTI/mutual funds, shall be exempt from tax, if such capital gains are invested in equity shares by way of a public issue.
   The section provides for a lock-in period of one year and if the newly acquired shares are sold or transferred during the period, the capital gains earlier claimed exempt, would become taxable in the year of sale of the newly acquired
   shares.
   
   
4. An investor who sells units of an equity oriented fund to the mutual fund will have to pay 0.2% of the sale price of the units as securities transaction tax which tax would be collected by the prescribed person in case of every mutual
   fund.
   
   
5. Section 88E provides that where the total income of a person includes income chargeable under the head “Profits and gains of business or profession” arising from sale of units of equity oriented funds, he shall get rebate equal to the
   securities transaction tax paid by him in the course of his business. Such rebate is to be allowed from the amount of income tax in respect of such transactions calculated by applying average rate of income tax.
   
   
6. Section 80C provides that an individual or HUF shall get deduction, in respect of contribution to any units of any Mutual Funds notified under clause 10(23D) of section 10 or from the Administrator or the specified company under any plan formulated in accordance with such scheme as the Central Government may, by notification in the Official gazette, specify in this behalf and in respect of contribution by an individual to any pension fund set up by the Mutual Fund notified under clause (23D) of section 10 or by the Administrator or the specified company, as the Central Government may, by notification in the Official Gazette, specify in this behalf, out of his income chargeable to tax being the aggregate sum does not exceed one lakh rupees.

TAX RULES FOR MUTUAL FUND INVESTORS AS PER FINANCE BILL 2008 - SNAPSHOT