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How to save tax through mutual fund investment? Well, for individual investors, there is a plethora of answers; can companies save tax? Well, let’s dig into it.

The world is a diverse and distinctive cumulation of heterogeneous elements. Humans are rich and poor, tall and short, young and old. They live across varied geographies, engage in varied professions and follow varied interests.

There is, however, one common factor that unites every tax-paying adult across the world.

At least once a year, you curse the government and wonder why they are taking away your hard-earned money. The cries of “Why me?” have echoed over cities, states and countries.

Over the years, all tax-payers have struggled to find methods to minimise their tax burden. From exemptions to deductions, we have exploited them all. We are pleased to report that there are several methods that you can use to save on tax payments.

Let’s get started then, shall we?

Companies, corporates, businesses, proprietors, did you know?

You can actually save on tax payments and generate high returns by investing your surplus! This means, if you invest in financial instruments like mutual funds, you can claim exemptions and reduce your tax liability.

This seems sort of ironic, doesn’t it?

How can you save by spending more?

Let’s find out.

Mutual Fund Investments for Non-Individuals

For companies, corporates, proprietors and other non-individuals, the taxation structure is slightly different. After all, the benefits of deductions under Section 80C of the Income Tax Act only apply to individuals and HUFs.

What, then, can companies do?

You can exploit the opportunities provided by the existing tax regime for non-individuals in India to minimise your tax liability.

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

If you make any capital gain on your mutual fund investments, you generally have to pay tax on the extra amount. Please note that any gain which is lesser than Rs. 1 lakh is exempt from taxes.

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.

Mutual Fund Distribution for Non-Individual Investors

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%

Please note that applicable surcharge*, securities transaction tax (STT)** and the Health & Education Cess @ 4% will be levied 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

Apart from capital gains, another source of income from mutual funds is through dividends. There are certain schemes that invest in dividend-paying companies and offer regular pay-outs.

The amount that you earn as a dividend is taxed separately. This can either be withdrawn at regular intervals, or it can be reinvested. All dividend income up to Rs. 5,000 per year is exempt from taxes.

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.

How does it work?

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.

Indexation removes the effect of inflation before calculating your net capital gains. This means, while your investment may have grown by Rs. 2 lakhs, you will only have to pay tax on Rs. 1.5 lakhs.

In other words, the indexation benefits in long-term debt investments effectively reduce your tax liability.

So, if you haven’t started your mutual fund investment journey already, get started today! Visit Takeoff, India’s first and only mutual fund distribution platform for businesses. The journey to high returns begins here!

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One Comment

  1. Vijayalakshmi says:

    Last year, due to market volatility, the debt funds were not performing well in my portfolio. So my FA realigned my portfolio for which he had to redeem some of the debt funds both long term and short term and reinvest. He re-invested in purchasing equity funds. But this attracted lot of tax burden on Capital Gain earned.
    I would like to know how the tax could have been avoided or if any other tax saving activity would have helped in minimizing this tax burden. This is going to repeat this year too. Please advise.

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