Mutual Fund Investments for Non-Individuals

The taxes structure for corporations, proprietorships, and other non-individuals differs slightly. After all, only individuals and HUFs are eligible for deductions under Section 80C of the Income Tax Act.

So, what can businesses do?
You can reduce your tax liability by taking advantage of the options afforded by India's current tax regime for non-individuals.

Long Term Capital Gains Tax (LTCG) vs. Short Term Capital Gains Tax (STCG)

If you achieve a capital gain on your mutual fund assets, you will almost certainly have to pay taxes on it. Please keep in mind that any gain of less than Rs. 1 lakh is tax-free.
If you have made capital gains in excess of Rs. 1 lakh, you will definitely have to pay tax on that amount. In this case, however, you can take advantage of the fact that the long-term capital gains tax rate (10%) is lower than the short-term capital gains tax rate (15-30%).
The trick here is to decide when you want to redeem your investment. You can reduce your tax liability by increasing the holding period slightly. For equity-oriented funds, any period longer than 12 months is classified as long-term, and for other funds, it is longer than 36 months.

EQUITY-ORIENTED FUNDS: 

Capital Gains Tax		Capital Gains TDS	Dividend Tax	Dividend TDS
Short Term	Long Term
15%	10%	–	According to the tax slab	10%

The appropriate surcharge*, securities transaction tax (STT)**, and the Health & Education Cess (at 4%), will all be assessed separately.

• A holding period will be classified as short-term when it is less than 12 months. Any holding period that is longer than 12 months will be classified as long-term.
• Any dividend amounts up to Rs. 5,000 in a year will be exempt from dividend tax.
• As per Section 112A, in the event of any transfer of the units of such funds will also be taxed at the same rate of 10%. This will apply if the units not already availing benefits under the foreign currency fluctuation provision or the indexation provision. Securities Transaction Tax is levied separately.

OTHER MUTUAL FUNDS:

Capital Gains Tax		Capital Gains TDS	Dividend Tax	Dividend TDS
Short Term	Long Term
15%/22%/25%/30%	10%	–	According to the tax slab	10%

Please note that the applicable surcharge* and the Health & Education Cess @ 4% will be levied separately.

• The holding period is classified as short-term when it is less than 36 months. Any holding period that is longer than 36 months will be classified as long-term.
• Any dividend amounts up to Rs. 5,000 in a year will be exempt from dividend tax.
• The long-term capital gains tax at this rate will be subject to indexation.
• For companies in the manufacturing sector, the lower short-term capital gains tax rate of 15% is optional as per Section 115 BAB.
• For companies who choose to opt for the new taxation regime, short-term capital gains tax is levied at 22%.
• For companies whose total turnover for the financial year does not Rs. 400 crores, short-term capital gains tax is levied at 25%.
• All other companies will be taxed at 30% for short-term capital gains.
• Please note that domestic companies are also subject to minimum alternate tax.

The following example will help decode this point.
Assume you have invested Rs. 1 crore in the Axis Flexi-Cap Fund for a period of 8 months. Based on the current return rates, you stand to make a profit of about Rs. 69 lakhs.

Now, if you redeem this amount immediately, you will incur short-term capital gains tax at 15%. This means you will have to pay Rs. 10 lakhs as tax.

On the other hand, if you wait for four more months before redeeming, you will fall under long-term capital gains tax rate of 10%. Your tax burden will essentially reduce to Rs. 6.9 lakhs.

By just waiting for 4 months, you can save almost Rs. 3 lakhs in tax.

Tax Exemption on Dividends
Dividends, in addition to capital gains, are another source of income from mutual funds. Certain schemes invest in dividend-paying companies and pay out on a regular basis.

Dividend income is taxed separately from other income. This money can either be taken out at regular periods or reinvested. All dividend income is tax-free up to Rs. 5,000 per year.

So, if you have an option of choosing between the dividend payout and reinvestment, it may be more beneficial from the tax perspective to choose the dividend payout option.

Assume you have invested Rs. 2.12 lakhs in the UTI Hybrid Equity Fund for a period of 1 year. Based on the current return rate, you can make a profit of Rs. 96,566. On top of that, assume you are getting a dividend payment worth Rs. 5,000.

If you choose the dividend reinvestment option, this amount will get added to your profit. If this brings the total capital gains for the year over Rs. 1 lakh, then you will have to pay short-term capital gains tax at 15%.

On the other hand, if you choose the dividend payout option, your capital gains for the year will be capped below Rs. 1 lakh, thus ensuring that you don’t have to pay tax on this amount.

Indexation Benefits
Indexation benefits play a huge role when you are investing in long-term debt funds. This factor is not valid for equity-oriented funds.

Over the long term, the price appreciations in investments are partly due to the capital gains or interest income. It is also partly due to the effects of inflation. Inflation gives you a somewhat distorted image of how your investment has truly grown.

Before computing your net capital gains, indexation eliminates the effect of inflation. This means that even if your investment increased by Rs. 2 lakhs, you will only be taxed on Rs. 1.5 lakhs.

To put it another way, indexation benefits in long-term debt investments essentially lower your tax bill.