A mutual fund trust is exempt from tax on its income and earnings under section 10(23D) of the Income Tax Act

Since the returns of the mutual fund are passed through its investors, the returns are taxed in the hands of the investors.

When an investor sells units of an equity fund in the stock exchange, or offers them for re-purchase to the fund, he will have to incur Securities Transaction Tax (STT) i.e. STT is applicable only on redemption/ switch to other schemes/ sale of units of equity oriented mutual funds whether sold on stock exchange or otherwise.

STT is not applicable on purchase of units of an equity scheme. It is also not applicable to transactions in debt securities or debt mutual fund schemes.

Dividends paid by domestic companies are subject to tax in the hands of investor @10% under income from other sources. However in case of dividend from domestic companies, dividend is exempt till ₹10,00,000.

• Long term capital gains (units held for more than 12 months)- 10% for Individual, HUF, Domestic company, NRI

• Short term capital gains (units held for 12 months or less)- 15% for Individual, HUF, Domestic company, NRI

• Long term capital gains (units held for more than 36 months) - 20% after indexation for Individual/HUF, Domestic companies; NRI (10% without indexation if unlisted otherwise similar as for Individual/HUF)

• Short term capital gains (units helf for 36 months or less) - according to the tax bracket of the investor.

Let us assume that you bought a debt mutual fund in 2016 for ₹40,000 (NAV- ₹10) and you are planning to sell the same after 3 years for ₹80,000 (NAV- ₹20).

As the holding period is more than 3 years, you can take benefit of long-term capital gains with indexation. Under which you cost of acquisition is adjusted for inflation.

Indexed cost of acquisition = Original cost of acquisition x (CII of the year of sale/ CII year of purchase)

Indexed cost of acquisition = ₹40,000 x (289/264) = ₹43,788

Hence amount of tax liability would be = Selling price – Indexed cost of acquisition = ₹80,000-43,788 = ₹ 36,212.

There is no TDS on the dividend distribution or re-purchase proceeds to resident investors. However, for certain cases of non-resident investments, with-holding tax is applicable. The income tax regulations prescribe different rates of withholding tax, depending on the nature of the investor (Indian / Foreign and Individual / Institutional), nature of investment (equity / debt) and nature of the income (dividend / capital gain).

Following are the provisions which are stated regarding set off of losses in mututal funds:

• Capital loss, short term or long term, cannot be set off against any other head of income (e.g.salaries).

• Short term capital loss is to be set off against short term capital gain or long term capital gain.

• Long term capital loss can only be set off against long term capital gain.

For example: let's say you have an income of ₹15,00,000 from salary and ₹5,00,000 as long term capital gains and ₹2,00,000 as short term capital gains. However you also inccured short term capital loss of ₹3,00,000 and long term capital loss of ₹5,00,000.

Short term capital loss of ₹2,00,000 can be set off with short term capital gains and the remaining ₹1,00,000 cannot be setoff. Long term capital loss of ₹5,00,000 can be set off with long term capital gains of ₹5,00,000.

Hence, total taxable income will be ₹15,00,000.

If, an investor buys unit within 3 months prior to the record date for a dividend, and sells those units within 9 months after the record date, any capital loss from the transaction would not be allowed to be set off against other capital gains of the investor, up to the value of the dividend income exempted. For example: Suppose an investor buys unit at ₹ 17 within 3 months prior to dividend record date (dividend of ₹2 per unit) and sells them at ₹15 within 9 months after record date. In normal course, capital loss would be available to set off of ₹2 per unit but because of the above mentioned provision the same cannot be availed.

If, an investor buys unit within 3 months prior to the record date for a bonus issue, and sells those units within 9 months after the record date, any capital loss from the transaction would not be allowed to be set off against other capital gains of the investor, up to the value of the dividend income exempted.

For example: Suppose an investor buys unit at ₹ 16 within 3 months prior to dividend record date (Bonus issue of 1:1 per unit) and sells them at ₹8 within 9 months after record date. In normal course, capital loss would be available to set off of ₹ per unit but because of the above mentioned provision the same cannot be availed.