Research by Sakshi Pandey ( pandeysakshi302@gmail.com)
Updated for finance bill 2024 as per general understanding.
Disclaimer : This blog is only for information purposes, and you should consult your tax advisor for exact tax treatment of your investments. We have done due diligence in producing this information for the purpose of understanding only, and we are not an authority in tax related matters. Use this information for general understanding purpose only. Further, tax rules are subject to change which may not have been captured in this blog.
Understanding the tax implications of investments is crucial for maximizing returns and complying with tax laws.
This blog provides a comprehensive guide to the taxation of various investment instruments, including Mutual Funds, Alternative Investment Funds (AIF’s), Portfolio Management Services (PMS), Bonds, and Life Insurance, along with some working examples.
1. Tax on Mutual Funds in India
Mutual Funds is a collective pool of money contributed by several investors and managed by a professional Fund Manager. For taxation, Mutual funds are classified into 3 types. Equity Funds, Debt Funds and Hybrid Funds. Learn More about mutual funds>
There are three types of incomes arising from mutual funds, and tax treatment differs according to the type of income.
Long term Capital gain
Short term capital gain
Dividend Income
The table below classify various asset classes into holding periods required to qualify for long term capital gain (LTCG)
Months for LTCG eligibility | Asset Class |
Holding period > 12 months | 1. Equity Funds 2. Hybrid funds with equity > 65% 3. Listed stocks 4. REITs 5. InVits 6. Listed bonds |
Holding period > 24 months | 1. Multi asset allocation funds 2. International FOFs 3. Gold/Silver ETFs 4. Unlisted securities |
No LTCG | 1. Debt Funds 2. Hybrid funds with equity < 65% |
Proposed capital gain taxes as per finance bill 2024 are shown in below table
Asset | LTCG Months | LTCG | STCG |
1. Equity Funds 2. Aggressive Hybrid funds (with equity > 65%) 3. Listed stocks | 12 | 12.5% (Increased from 10% earlier)
*Note: Exemption of Rs 1.25 Lakh on long term capital gains tax (Increased from earlier Rs 1 Lakh) | 20% (Increased from 15% earlier) |
1. REITs 2. InVits | 12 | 12.5% (Increased from 10% earlier) | 20% (Increased from 15% earlier) |
1. Listed bonds | 12 | 12.5% (Increased from 10% earlier) | 20% (Was at slab rates earlier) |
1. Fund of Funds 2. Multi asset funds 3. International funds 4. Gold/ Silver ETFs | 24 | 12.5% | 20% |
1. Debt Funds 2. Conservative hybrid funds (with equity < 65%) 3. Unlisted bonds/ debentures | No LTCG | Slab Rates | |
1. Real estate 2. Physical gold 3. Unlisted stocks 4. Foreign equities/ debt | 24 | 12.5% |
General rules and guidelines for all investors
Non-filers of income tax returns: Section 206AB of the Act stipulates an increased TDS rate for individuals who have not filed their income tax returns. The TDS rate under this section is determined as the higher of the following: i) twice the rate specified in the relevant provision of the Act; or ii) twice the prevailing rate(s); or iii) a flat rate of five percent. However, this provision does not apply to non-residents without a permanent establishment in India and individuals not obligated to file income tax returns for the relevant assessment year.
Tax on Dividends: 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.
Tax on Switching of Mutual fund schemes
Switching units of mutual fund within the same scheme from Growth Plan to Dividend Plan and vice-versa is subject to capital gains tax.
Switching of units from regular to direct plan also attract capital gains taxes.
2. Tax on Alternate Investment Funds (AIFs) in India
AIF- An Alternative Investment Fund (AIF) is a privately pooled investment vehicle that focuses on alternative asset classes such as private equity, venture capital, hedge funds, real estate, commodities, and derivatives. Typically, AIFs attract investments from High Net Worth Individuals (HNIs) and institutional investors due to the higher investment thresholds involved. Learn more about AIFs>
AIFs in India are regulated by the Securities and Exchange Board of India (SEBI). According to the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF can be structured as a trust, company, limited liability partnership, or corporate body. However, most AIFs registered with SEBI are structured as trusts.
Taxation of Alternative Investment Funds (Category-Wise)
Each category of Alternative Investment Fund (AIF) is taxed differently, making it crucial for investors to understand their tax implications.
For Category I and II AIFs, any income (except business income) is taxed at the investor's applicable tax rate.
However, for Category III AIFs, the income is tax-free for investors because these funds do not have pass-through status, meaning the fund itself is responsible for paying the tax. Let's delve into the specific tax regulations for AIFs.
Category I and II AIFs:
The Finance Act of 2015 introduced a special taxation regime for Category I and II Alternative Investment Funds (AIFs), granting them pass-through status. This means that the income generated by these funds is taxed at the investor's level, not at the fund level, making the investor responsible for the tax liability. The fund itself is exempt from taxes on investment income or capital gains. However, if the fund's income is considered business income, it is taxed at the fund level. The table below clarifies the tax structure.
Nature of Income of the Fund | Tax Liability |
|---|---|
Capital Gains or any income other than business income | The fund is not liable for tax. The burden to pay tax is on the investor |
Business Income | Taxed in the hand of the fund |
For Category I and II, which are taxed at the hands of the investor, following are the tax provisions that individual investors have to look into
Long Term Capital Gain | Short Term Capital Gain | Dividend Income | Interest Income / other income |
|---|---|---|---|
Listed shares : 10% Unlisted Shares : 20% Other assets : 20%
| Listed Shares : 15% Unlisted Shares : Investor’s marginal rate Other Assets : Investor’s marginal rate | Investor’s marginal rate | Investor’s marginal rate |
Category III AIFs:
In Category III Alternative Investment Funds (AIFs), all types of income—whether from investments, capital gains, or business—are taxed at the fund level. Hence investor does not have to take any taxes into consideration at his level.
However the fund pays the taxes, and these reduce the investor's income accordingly. Hence it is essential to understand how much does the fund pay.
Here's a summary of the taxation structure applicable to Category III AIFs:
Types of Income | Tax Rate |
Long Term Capital Gain | 10% |
Short Term Capital Gain | 15% |
Dividend Income | 30% |
Interest Income | 30% |
Business Income | 30% |
3. Taxation on Portfolio Management Services (PMS) in India
Portfolio Management Services (PMS) act as a dedicated financial planner, creating personalized investment strategies based on your financial goals and risk tolerance. Similar to how a personal chef tailors meals to your dietary needs, PMS involves an experienced money manager who oversees your portfolio to ensure it aligns perfectly with your financial objectives. Learn more about PMS>
Taxation on PMS
Transactions under PMS occur directly from the client’s Demat account and are taxed as normal capital gains. PMS transactions are treated as regular buy and sell activities in the client’s Demat account, not as intermediary actions like mutual funds. Therefore, the income from PMS is classified based on general principles of capital market transactions, such as volume, frequency, intention, and holding period.
A key point in PMS taxation is the treatment of service charges and fees. If PMS income is shown as capital gains, these expenses cannot be deducted. However, if shown as business income, they are deductible.
Equity Capital Gains:
Short-term (held less than 1 year): 15%
Long-term (held more than 1 year): 10% (with a Rs 1 lakh exemption)
Non-Equity Capital Gains:
Short-term (held less than 3 years): Added to income and taxed as per your tax slab
Long-term (held more than 3 years): 20% with indexation benefits
Equity Dividend Income and Interest Income: Both are added to your income and taxed according to your tax slab.
Specific for NRIs
For NRI investors in PMS services, the brokerage business deducts taxes (TDS) and pays the net earnings. At the end of the year, portfolio managers provide tax statements for filing taxes. They ensure transparency and will not make transactions without informing you. Even if your capital gains in India are less than Rs. 2,50,000, it's important to file a tax return to reclaim taxes deducted at the source.
4. Taxation on Bonds in India
A bond is a type of investment where you lend money to a government or company for a set period at a specific interest rate. In return, you receive regular interest payments and get your original investment back when the bond matures. Companies and governments use bonds to raise money for projects and operations.
Bond Type | Taxation on Interest | Taxation on Capital Gains |
|---|---|---|
Taxable Bonds | Taxed as per income tax slab | Listed Bonds: LTCG are taxed at 10% without indexation benefit. STCG are taxed as per the income tax slab. Unlisted bonds: LTCG are taxed at 20% without an indexation benefit. STCG are taxed as per the income tax slab. |
Tax- Free Bonds | Interest income not taxed | · Maturity / sold > 1 Year = LTCG ( Taxed at 20% with indexation or 10% without indexation) · Maturity / sold < 1 Year = STCG (Taxed at marginal rate of investor) |
Tax- Saving Bonds | Taxed as per income tax slab | Taxed based on the holding period. Investment can be claimed for deduction under Section 80CCF, up to ₹20,000. |
Zero- Coupon Bonds | No interest, no taxes | · Maturity / sold > 1 Year = LTCG ( Taxed at 20% with indexation or 10% without indexation) · Maturity / sold < 1 Year = STCG (Taxed at marginal rate of investor) |
Sovereign Gold Bonds(SGB) | Taxed as per income tax slab | Exempted from tax if held till maturity. LTCG tax of 20% with indexation benefit is applicable if sold after 5 years but before 8 years. |
Disclaimer : This blog is only for information purposes, and you should consult your tax advisor for exact tax treatment of your investments. We have done due diligence in producing this information for the purpose of understanding only, and we are not an authority in tax related matters. Use this information for general understanding purpose only. Further, tax rules are subject to change which may not have been captured in this blog.
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