Income received from units of a mutual fund registered with the Securities and Exchange Board of India is exempt in the hands of the unitholder. A debt-oriented mutual fund is liable to pay income distribution tax of 14.1625% and 22.66% on the distribution of income to individual / Hindu Undivided Fund and other persons, respectively. In the case of “money market mutual funds” and “liquid mutual funds” (as defined under SEBI regulations), the income distribution tax is 28.325% across all categories of investors.
Long-term capital gains arising on the transfer of units of an ‘equity-oriented mutual fund is exempt from income tax if the Securities Transaction Tax (STT) is paid on this transaction i.e., the transfer of such units should be made through a recognized stock exchange in India (or such units should be repurchased by the relevant mutual fund). ‘Equity oriented’ mutual fund means a fund where the investible corpus is invested by way of equity shares in Indian companies to the extent of more than 65% of the total proceeds of the fund. Short-term capital gains arising on such transactions are taxable at a base rate of 15% (increased by a surcharge as applicable, an education cess of 2%, and secondary and higher education cess of 1%). If a transaction is not covered by STT, the long-term capital gain tax rate would be 10% without indexation or 20% with indexation, depending on which the assessee opts for. Short-term capital gains on such transactions are taxable at normal rates.
A taxable ‘capital loss’ (i.e., a transaction on which there is a liability to pay tax if the result were ‘gains’ instead of ‘loss’) can be set off only against ‘capital gains’. An exempt capital loss (i.e., a transaction which is exempt from tax if the result were ‘gains’ instead of ‘loss’) cannot be set off against taxable capital gains. A taxable long-term capital loss can be set off only against long-term capital gains. However, a taxable short-term capital loss can be set off against both short-term and long-term capital gains.
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