The Indian income-tax law specifically recognizes the following tax exempt funds1:
Alternate Investment Funds (AIF)
As per the Finance Act, 2013, income of a Venture capital Fund (VCF), registered under the Securities and Exchange Board of India (SEBI) (AIF) Regulations 2012, shall be exempt from tax. Pass through status has been provided to these funds, i.e., the income will be taxed in the hands of the investors, as and when accrued or received by them.
Under Indian income-tax law, the entire income earned by any mutual fund registered with the SEBI (Mutual Funds) Regulations, 19962 is exempt from tax in India.
The mutual fund will receive all income without any withholding tax.
Income distributed by a mutual fund is exempt in the hands of the unit holders; however, income distribution tax (IDT) must be paid by the mutual fund at the following rates:
For income distributed to any persons being individuals or Hindu Undivided Family:
For income distributed to any other person:
To avoid double taxation, IDT is not paid when distributing income to a unitholder of equity-oriented funds.
STT is charged on transactions entered into a recognized stock exchange, at varying rates on the value of specified taxable securities.
The recent changes to STT rates are as under:
|Nature of transaction||Payable by||Value on which tax shall be levied||Rate of tax (%)|
|Up to 31 May 2013||1 June 2013 and onwards|
|Delivery-based purchase/ sale transaction in equity shares entered in a recognized stock exchange||Purchaser/ Seller||Value at which shares are bought/ sold||0.1||0.1|
|Delivery-based purchase transaction in units of equity-oriented fund entered in a recognized stock exchange||Purchaser||Value at which units are bought||0.1||NIL|
|Delivery-based sale transaction in units of equity-oriented fund entered in a recognized stock exchange||Seller||Value at which units are sold||0.1||0.001|
|Non-delivery-based sale transaction in equity shares or units of equity-oriented fund entered in a recognized stock exchange||Seller||Value at which shares/units are sold||0.025||0.025|
|Sale of a futures in securities||Seller||Futures: The value at which futures are traded||0.017||0.01|
|Sale of an option in securities||Seller||Options: The option premium||0.017||0.017|
|Sale of an option where the option is exercised||Seller||Value at which the units are sold||0.25||0.001|
|Sale of unlisted equity shares under an offer for sale to the public included in an in initial public offer and subsequently listed on a recognized stock exchange.||Seller||Value at which shares are sold||0.2||0.2|
|Sale of an option where the option is exercised||Purchaser||Settlement price||0.125||0.125|
Value of taxable securities transaction in case of:
Equity-oriented fund means a fund:
STT applicable on Equity-oriented schemes:
Foreign funds may invest in Indian markets through the following alternate modes:
FII – It is an entity established or incorporated outside India, which proposes to make investment in India. An FII is registered under and governed by the SEBI (FII) Regulations, 1995.
QFI – Specified class3 of foreign investors allowed to invest in Indian Mutual Funds through SEBI registered qualified depository participants (QDP’s) in listed securities such as listed non-convertible debentures, listed bonds of Indian Companies, listed units of mutual funds and corporate bonds that are to be listed within 15 days. To facilitate such investment, SEBI and RBI4 have laid down the regulatory procedural guidelines and conditions, one of the conditions being that the redemption proceeds would be subject to withholding at applicable rates.
Income of such Foreign funds (FIIs and QFIs), are subject to tax in India.
Under the Indian income-tax laws, a specific tax regime is in existence to tax FIIs in India. However, in case of QFIs, clarification with regard to specific tax regime (especially withholding regime) is awaited. In the absence of such clarification, we understand that this route of investment has not been practically implemented. Hence, the general taxes as applicable to non residents also apply to QFIs.
The domestic tax law provides concessions to FIIs as regards taxation of income from dividend (that is, dividends which are not exempt), interest on securities and capital gains arising on alienation of Indian securities. Income from dividends (other than exempt dividend) and interest on securities of FIIs is taxed at a concessional rate of 20 percent plus applicable surcharge and education cess thereon.
Capital gains tax rates*
|Income Type||Corporate/ Non Corporate|
|Short Term Capital Gain (%)||Long Term Capital Gain (%)|
|Sale of listed securities (STT paid)||15||NIL|
|Sale of listed securities (STT not paid)||30||108|
|Sale of unlisted securities||30||108|
*Surcharge, as relevant, and cess would apply in addition.
In case of QFIs, income from dividends (other than exempt dividend) and interest on securities5 will be taxed at the rates, as applicable to non residents.
In absence of a specific tax regime for QFI’s, the tax rates below shall apply:
Capital gains tax rates*
|Income Type||Corporate||Non Corporate|
|Short Term Capital Gain (%)||Long Term Capital Gain (%)||Short Term Capital Gain (%)||Long Term Capital Gain (%)|
|Sale of listed securities (STT paid)6||15||NIL||15||NIL|
|Sale of listed securities (STT not paid)6||40||207 (10% - without indexation)||30||207 (10% - without indexation)|
|Sale of unlisted securities6||40||108||30||108|
*Surcharge, as relevant, and cess would apply in addition.
Applicable surcharge rates as amended by the Finance Act 2013 are:
For Corporate entities
For Non- Corporates
In all cases, education cess of 3 percent is leviable on tax plus surcharge.
In the case of a remittance to a country with which a double taxation Avoidance agreement (DTAA) is in force, the tax ought to be deducted at the rate specified in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the taxpayer. However, the applicability of beneficial rate will be subject to fulfillment of PAN8 and TRC9 conditions. (Also refer to para 1.7 on TRC)
The taxation of resident investors is as follows.
Income distributed by a mutual fund is exempt from tax in the hands of the recipient.
Period of holding - A unit of a mutual fund, shares of a company and listed securities held by the investor as a capital asset, is considered to be a short-term capital asset, if it is held for 12 months or less from the date of its acquisition by the investor. Accordingly, if the unit of a mutual fund, shares of a company, and listed securities is held for a period of more than 12 months, it is treated as a long-term capital asset. In case of unlisted securities, the period of 12 months should be read as 36 months.
In this context, the definitions of “capital asset” and “transfer” have been widened with retro-effect from 1 April 1961 specifically with a view to tax in the hands of non-residents, gains from direct or indirect transfer of assets in India.
In the context of units of a registered mutual fund:
Where sale/repurchase transaction of units (other than equity-oriented fund) is not chargeable to STT:
Long-term capital gains tax on the transfer of units other than equity-oriented fund is levied at the rate of 20 percent, subject to an upper limit of 10 percent of the gains computed without the benefit of cost indexation. Short-term capital gains tax would apply at normal rates depending on the type of entity. The tax liability is further increased by surcharge and education cess.
Where sale/repurchase transaction of units of equity-oriented fund is chargeable to STT:
As tabulated in point 1.1 above, STT is chargeable on transactions of purchase or sale of units of equity-oriented mutual fund on the recognized stock exchange and sale of equity-oriented mutual fund to the mutual fund.
Education cess of 3 percent is levied on tax plus surcharge (if any) in all cases
Long-term capital gains are exempt from tax if the capital gains are invested within six months from the transfer of the units in certain bonds issued by specified institutions.
The worldwide income of an Indian resident is taxable in India. Benefits under India’s double taxation agreements with the country involved can be availed of.
Income of a mutual fund registered with SEBI is exempt from income-tax. Thus, there are no Indian income-tax implications for registered mutual funds who invest in units of non-resident funds.
The taxation of non-resident investors is as follows:
Income distributed by a mutual fund registered with SEBI is not liable to tax in the hands of the unitholder. The tax treatment is the same as in the case of a resident unitholder.
Period of holding – as explained in Para 1.2 above.
In the case of a remittance to a country with which a double taxation Avoidance agreement (DTAA) is in force, the tax ought to be deducted at the rate specified in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the taxpayer. (Also refer to para 1.7 on tax residency certificate)
Mutual Funds would be obliged to withhold tax at penal rates of TDS in case of payments to investors who have not furnished their PAN. The penal rate of TDS is 20 per cent or any higher rate of TDS, as may be applicable.
Asset management companies (AMCs), by way of domestic companies, are taxed on their worldwide income, in accordance with the provisions of the Income-tax Act, 1961. The income of an AMC from managing the fund is taxed as profits and gains of a business. The currently applicable income tax rate for a domestic company is 30 percent plus a NIL surcharge where the income does not exceed INR 10 million. A surcharge of 5 percent of the tax where the income exceeds INR 10 million but up to INR 100 million or 10 percent where the income exceeds INR 100 million and education cess at 3 percent on tax plus surcharge, if applicable, resulting in an effective tax rate of 30.90 percent or 32.445 percent or 33.99 percent, as the case may be.
Custodian companies are taxed in the same manner as other companies.
Under the domestic law, income generally arises to the unitholder only when it is distributed by the fund.
All funds, which are tax resident either in India or in another country with which India has a treaty, have access to India’s double taxation treaty network. Entitlement to the benefits under a treaty depends upon the provisions of the applicable treaty.
For non-residents claiming tax treaty benefits, it is mandatory to obtain from the home country tax authority a tax residency certificate (‘TRC’) of his being a resident. The non-resident may also be required to provide such other documents and information as may be prescribed.
The Act states that the government may by notification; assign meanings to any term used in any tax treaties but not defined in the domestic tax law or in such treaty. Such definition shall be effective from the date of coming into force of the tax treaty.
India has a wide international tax treaty network having signed tax treaties for avoidance of double taxation with more than 85 countries (including 17 countries with which it has signed limited tax treaties).
At the time of incorporation, companies are required to pay stamp duty on their authorized capital to the stamp authorities of the state concerned and registration fees to the registrar of companies. Stamp duties vary from state to state. Registration fees are payable on a sliding scale based on the nominal share capital.
Allotment and transfer of shares or securities is generally subject to stamp duty in India. However, allotment and transfer of units in a mutual fund is not subject to stamp duty.
There are no capital duties and transfer taxes in India.
Services of AMCs are liable to service tax.
Mutual funds/AMCs are also liable to pay service tax as recipient of services, under the reverse charge mechanism for specified services received by them, including in particular, the following:
Services rendered by mutual funds/AMCs from agents/ distributors of mutual funds are exempted from the levy of the service tax with effect from 1 July 2012. Consequently, mutual funds/AMCs are not liable to pay service tax on such services under the reverse charge mechanism.
The current standard rate of service tax is 12 percent plus education cess at the rate of 3 percent. The effective tax rate is, therefore, 12.36 percent.
Dividend stripping (shares): If shares are purchased within a period of three months prior to the record date of declaration of dividend on shares and are sold within three months after the record date, the loss, if any, arising is ignored to the extent of the dividend on shares which is exempt from tax.
Dividend stripping (units): If units are purchased within a period of three months prior to the record date of declaration of income on units and are sold within nine months after the record date, the loss, if any, arising is ignored to the extent of the income on units, which is exempt from tax.
Bonus stripping: In case of units purchased within a period of three months prior to the record date for entitlement of bonus and sold within nine months after the record date, the loss arising on transfer of original units shall be ignored for the purpose of computing the income chargeable to tax. The loss so ignored shall be treated as cost of acquisition of such bonus units.
The Finance Act 2013 has postponed the implementation of GAAR to be effective from 1 April 2015, where the tax authorities will have the power to invoke GAAR in cases where an arrangement is entered into for obtaining tax benefit being the primary purpose and hence, can be declared as an “impermissible avoidance agreement”.
The GAAR provisions seek to confer on the tax officer extensive powers, to disregard/ combine/ recharacterise transactions/ persons in situations where there is a tax avoidance motive or where such motive is presumed to exist in law.
Invoking the GAAR provisions may also lead to denial of tax treaty benefits . There are no specific tax provisions governing other collective investment schemes.
The Act extends the levy of AMT to tax unit holders (other than companies) to pay AMT at the rate of 18.5 percent (plus applicable surcharge and cess) on the adjusted total income. In a situation where the income-tax computed as per normal provisions of the Act is less than the AMT on “adjusted total income”, the unit holder shall be liable to pay tax as per AMT. “Adjusted total income” for this purpose is the total income before giving effect to the deductions under any section (except section 80P) included in chapter VIA under heading C - Deduction in respect of certain income and section 10AA. AMT will not apply to an Individual, HUF, AOP, BOI or any Artificial Juridical Person if the adjusted total income of such person does not exceed INR 20 lakhs. Further, the credit of AMT which can be further carried forward to ten subsequent years and set off in the year(s) where regular income tax exceeds the AMT.
In order to claim benefit of lower tax rates under the domestic law or treaty, as the case may be, the investors will have to obtain an Indian tax registration number/ PAN. In a situation where such PAN is not obtained, a penal withholding tax rate will apply at the higher of:
An investor is required to quote and attach a copy of the permanent account number on the application for purchase of units of a mutual Fund. The Trustee of a mutual fund or a person managing the affairs of the mutual fund on the authority of the trustee is required file an Annual Information Return (AIR) for receipt of INR 200,000 or more from a person for purchase of units of a mutual fund. This return is required to be filed on or before 31 August following the financial year in which the specified transactions have been registered or recorded with them.
India does not levy any inheritance tax at present.
Units of mutual funds do not attract wealth tax.
1 This document takes into account the provisions of the Income Tax Act, 1961, as amended by the Finance Act, 2013.
2 SEBI is the regulator of the capital markets in India.
3 Any person resident in a country that is a member of Financial Action Task Force (FATF) or a member of a group which is a member of FATF and which is a signatory to International Organization of Securities Commission (IOSCO’s) Multilateral Memorandum of Understanding (MMOU) or a signatory of a bilateral MOU with SEBI, and not a resident of a specifically debarred country. Further, such person should not be a SEBI registered FII, sub-account or FVCI.
4 The RBI is the central bank of India which manages the foreign exchange law.
5 As per the Finance Act 2013, interest earned by a FII/ QFI from investments in rupee denominated bonds of an Indian Company or Government security will be subject to lower withholding rate of 5%, subject to the following:
6 Where shares/ debentures are purchased in foreign currency, capital gains shall be computed by converting full value of consideration, cost of acquisition and cost of improvement in the foreign currency in which shares/debentures were purchased. Capital gains so computed shall be reconverted to Indian currency.
7 Subject to an upper limit of 10 percent of the gains computed without the benefit of applicable cost indexation in case of listed shares and units.
8 Without giving benefit of indexation/currency fluctuation protection.
9 Permanent Account Number
10 Tax Residency Certificate
© 2016 BSR and Company, an Indian firm of Chartered Accountants. All rights reserved.