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Questions and Answers
According to SEBI regulations, what is the minimum percentage of investment in Indian equities required for a scheme to be classified as an equity scheme for taxation purposes?
According to SEBI regulations, what is the minimum percentage of investment in Indian equities required for a scheme to be classified as an equity scheme for taxation purposes?
- 60%
- 65% (correct)
- 75%
- 51%
Long Term Capital Gains (More than 12 months holding period) is taxed at 15%.
Long Term Capital Gains (More than 12 months holding period) is taxed at 15%.
False (B)
What is the Securities Transaction Tax (STT) rate applicable on the value of the selling price when exiting an equity scheme?
What is the Securities Transaction Tax (STT) rate applicable on the value of the selling price when exiting an equity scheme?
0.001%
If mutual fund units of an equity scheme are sold before _____ months, the resulting profit is subject to short term capital gains tax.
If mutual fund units of an equity scheme are sold before _____ months, the resulting profit is subject to short term capital gains tax.
Match the investment scheme with its corresponding tax treatment on capital gains when held for more than 12 months:
Match the investment scheme with its corresponding tax treatment on capital gains when held for more than 12 months:
Fixed Maturity Plans (FMPs) offer better liquidity compared to bank fixed deposits due to the absence of premature withdrawal facilities.
Fixed Maturity Plans (FMPs) offer better liquidity compared to bank fixed deposits due to the absence of premature withdrawal facilities.
According to the regulations, what is the maximum percentage of a scheme's NAV that can be invested in rated debt instruments of a single issuer, with the possibility of extension after approval?
According to the regulations, what is the maximum percentage of a scheme's NAV that can be invested in rated debt instruments of a single issuer, with the possibility of extension after approval?
Under Section 10(23D) of the Income Tax Act, 1961, income earned by a Mutual Fund registered with ______ is exempt from income tax.
Under Section 10(23D) of the Income Tax Act, 1961, income earned by a Mutual Fund registered with ______ is exempt from income tax.
What is the maximum percentage of a company's paid-up capital carrying voting rights that a fund can hold under all its schemes?
What is the maximum percentage of a company's paid-up capital carrying voting rights that a fund can hold under all its schemes?
What is the maximum investment percentage of NAV allowed for open-ended schemes in unlisted securities issued by entities other than the sponsor or sponsor's group?
What is the maximum investment percentage of NAV allowed for open-ended schemes in unlisted securities issued by entities other than the sponsor or sponsor's group?
Mutual fund schemes are allowed to invest in unlisted securities of their sponsor or its group entities.
Mutual fund schemes are allowed to invest in unlisted securities of their sponsor or its group entities.
What is the maximum percentage of a scheme's NAV that can be invested in unrated paper of a single issuer?
What is the maximum percentage of a scheme's NAV that can be invested in unrated paper of a single issuer?
Match the investment restriction with its corresponding percentage limit of Net Asset Value (NAV):
Match the investment restriction with its corresponding percentage limit of Net Asset Value (NAV):
According to SEBI guidelines for mutual funds, which factor determines the product labeling?
According to SEBI guidelines for mutual funds, which factor determines the product labeling?
The 'riskometer' is a pictorial representation that indicates the expense ratio of a mutual fund scheme.
The 'riskometer' is a pictorial representation that indicates the expense ratio of a mutual fund scheme.
What is the role of AMFI in the context of product labeling for mutual funds?
What is the role of AMFI in the context of product labeling for mutual funds?
A resident investor sells mutual fund units, resulting in a capital gain. To calculate the tax liability, what is the primary benefit of using the indexed cost of acquisition?
A resident investor sells mutual fund units, resulting in a capital gain. To calculate the tax liability, what is the primary benefit of using the indexed cost of acquisition?
Mutual funds offer investors the advantage of having their money managed by ______ fund managers.
Mutual funds offer investors the advantage of having their money managed by ______ fund managers.
Which of the following entities is responsible for paying Dividend Distribution Tax (DDT) on debt mutual funds?
Which of the following entities is responsible for paying Dividend Distribution Tax (DDT) on debt mutual funds?
Dividends from equity mutual funds are subject to Dividend Distribution Tax (DDT).
Dividends from equity mutual funds are subject to Dividend Distribution Tax (DDT).
Match the risk level with its corresponding description:
Match the risk level with its corresponding description:
Which of the following is NOT an advantage typically offered by mutual funds?
Which of the following is NOT an advantage typically offered by mutual funds?
What is the primary reason Fixed Maturity Plans (FMPs) can provide higher post-tax returns compared to traditional bank Fixed Deposits (FDs) for investors in higher tax brackets?
What is the primary reason Fixed Maturity Plans (FMPs) can provide higher post-tax returns compared to traditional bank Fixed Deposits (FDs) for investors in higher tax brackets?
Investing directly in individual stocks always provides more liquidity than investing in mutual funds.
Investing directly in individual stocks always provides more liquidity than investing in mutual funds.
What is the tax rate applied to long-term capital gains for Foreign Institutional Investors (FII) without availing indexation benefit?
What is the tax rate applied to long-term capital gains for Foreign Institutional Investors (FII) without availing indexation benefit?
Besides debt and equities, what other asset classes can mutual fund schemes invest in today?
Besides debt and equities, what other asset classes can mutual fund schemes invest in today?
A Fixed Maturity Plan (FMP) is a ______ ended debt fund for a specified period.
A Fixed Maturity Plan (FMP) is a ______ ended debt fund for a specified period.
Match the investor type with the applicable Dividend Distribution Tax (DDT) rate:
Match the investor type with the applicable Dividend Distribution Tax (DDT) rate:
If an investor in the 30% tax bracket is comparing a bank FD to an FMP, which factor is most critical in determining whether the FMP will provide a better post-tax return?
If an investor in the 30% tax bracket is comparing a bank FD to an FMP, which factor is most critical in determining whether the FMP will provide a better post-tax return?
Why do investors sometimes stop their SIPs during bear markets?
Why do investors sometimes stop their SIPs during bear markets?
Systematic Investment Plans (SIPs) guarantee high returns irrespective of market conditions.
Systematic Investment Plans (SIPs) guarantee high returns irrespective of market conditions.
What is the primary benefit of using Systematic Investment Plans (SIPs) in volatile markets?
What is the primary benefit of using Systematic Investment Plans (SIPs) in volatile markets?
In a Systematic Withdrawal Plan (SWP), an investor invests a ______ amount and withdraws money regularly.
In a Systematic Withdrawal Plan (SWP), an investor invests a ______ amount and withdraws money regularly.
Match the following investment plans with their descriptions:
Match the following investment plans with their descriptions:
What is a Micro SIP, as facilitated by SEBI?
What is a Micro SIP, as facilitated by SEBI?
How does a Systematic Transfer Plan (STP) enhance returns compared to a regular SIP?
How does a Systematic Transfer Plan (STP) enhance returns compared to a regular SIP?
Liquid funds used in STPs typically have high exit loads.
Liquid funds used in STPs typically have high exit loads.
In a mutual fund's growth option, if an investor initially holds 1,000 units and the NAV increases to Rs. 112, what is the total value of the investor's holdings?
In a mutual fund's growth option, if an investor initially holds 1,000 units and the NAV increases to Rs. 112, what is the total value of the investor's holdings?
Dividend payout options in mutual funds provide the same compounding benefits as dividend reinvestment options.
Dividend payout options in mutual funds provide the same compounding benefits as dividend reinvestment options.
In a dividend reinvestment option, an investor receives Rs. 12 per unit as a dividend and chooses to reinvest it when the NAV is Rs. 100. If the investor holds 1,000 units initially, how many additional units will the investor acquire?
In a dividend reinvestment option, an investor receives Rs. 12 per unit as a dividend and chooses to reinvest it when the NAV is Rs. 100. If the investor holds 1,000 units initially, how many additional units will the investor acquire?
The formula for compound interest is: A = P * (1 + r)^t, where 't' represents the ______ for which money is invested.
The formula for compound interest is: A = P * (1 + r)^t, where 't' represents the ______ for which money is invested.
According to the content, which of the following factors has the biggest impact on on the final amount in compound interest?
According to the content, which of the following factors has the biggest impact on on the final amount in compound interest?
For equity schemes, what is true regarding Dividend Distribution Tax?
For equity schemes, what is true regarding Dividend Distribution Tax?
Match the mutual fund option with its description:
Match the mutual fund option with its description:
An investor is comparing a growth option and a dividend reinvestment plan. After a certain period, both options result in a total value of Rs. 1,12,000. What can be concluded about the returns from both options?
An investor is comparing a growth option and a dividend reinvestment plan. After a certain period, both options result in a total value of Rs. 1,12,000. What can be concluded about the returns from both options?
Flashcards
Capital Gains
Capital Gains
Profits from selling mutual fund units.
Securities Transaction Tax (STT)
Securities Transaction Tax (STT)
Tax on buying/selling securities, like mutual fund units.
Equity Schemes
Equity Schemes
Schemes with at least 65% invested in Indian equities.
Long Term Capital Gains (Equity MF)
Long Term Capital Gains (Equity MF)
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Short Term Capital Gains (Equity MF)
Short Term Capital Gains (Equity MF)
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FII Long Term Capital Gains Tax Rate
FII Long Term Capital Gains Tax Rate
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Resident Long Term Capital Gains Tax Rate
Resident Long Term Capital Gains Tax Rate
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Dividend Distribution Tax (DDT)
Dividend Distribution Tax (DDT)
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DDT on Equity Funds
DDT on Equity Funds
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DDT Rate (Individuals, HUF)
DDT Rate (Individuals, HUF)
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DDT Rate (Others)
DDT Rate (Others)
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DDT Rate (Non-Residents, IDF)
DDT Rate (Non-Residents, IDF)
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FMP Tax Advantages
FMP Tax Advantages
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Liquidity of Bank Fixed Deposits
Liquidity of Bank Fixed Deposits
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Tax Exemption for SEBI-Registered Mutual Funds
Tax Exemption for SEBI-Registered Mutual Funds
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NAV Investment Limit in Single Issuer Debt
NAV Investment Limit in Single Issuer Debt
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NAV Investment Limit in Unrated Paper
NAV Investment Limit in Unrated Paper
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Investment Limit in Money Market Instruments
Investment Limit in Money Market Instruments
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Limit on Holding Company's Paid-Up Capital
Limit on Holding Company's Paid-Up Capital
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NAV Investment Limit in Single Company Equity
NAV Investment Limit in Single Company Equity
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Inter-Scheme Investment Limit
Inter-Scheme Investment Limit
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Riskometer
Riskometer
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Low Risk (Mutual Funds)
Low Risk (Mutual Funds)
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Moderately Low Risk
Moderately Low Risk
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Moderate Risk
Moderate Risk
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Moderately High Risk
Moderately High Risk
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High Risk
High Risk
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Mutual Fund Advantage: Professional Management
Mutual Fund Advantage: Professional Management
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Mutual Fund Advantage: Liquidity
Mutual Fund Advantage: Liquidity
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Averaging
Averaging
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SIP Benefit: Averaging
SIP Benefit: Averaging
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Micro SIPs
Micro SIPs
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Systematic Transfer Plan (STP)
Systematic Transfer Plan (STP)
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STP Benefit: Higher Interest
STP Benefit: Higher Interest
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Systematic Withdrawal Plan (SWP)
Systematic Withdrawal Plan (SWP)
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SWP Function
SWP Function
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SIP Benefit: Bear Markets
SIP Benefit: Bear Markets
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Dividend Payout Option
Dividend Payout Option
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Dividend Reinvestment Option
Dividend Reinvestment Option
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Compound Interest Formula
Compound Interest Formula
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Compound Interest
Compound Interest
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Principal
Principal
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Rate of Interest
Rate of Interest
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Time (in Compounding)
Time (in Compounding)
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Amount (in Compounding)
Amount (in Compounding)
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Study Notes
- Taxation of mutual funds involves understanding Capital Gains, Securities Transaction Tax (STT), and Dividends
- Tax regulations for mutual funds vary based on whether the scheme is equity-oriented or debt-oriented, and also on the investor type, such as Individuals, NRIs, OCBs, and corporations
- Investors can avail benefits under Section 80C of the Income Tax Act by investing in Equity Linked Savings Schemes
Capital Gains Taxation
- Equity mutual funds are taxed differently based on the holding period
- Long Term Capital Gains (held for more than 12 months) are taxed at 0%
- Short Term Capital Gains (held for less than or equal to 12 months) are taxed at 15% plus applicable surcharge and cess
Equity Schemes
- Schemes with a minimum of 65% of average weekly net assets invested in Indian equities are categorized as equity schemes according to SEBI Regulations
- Profits from equity scheme mutual fund units sold, redeemed, or repurchased after 12 months are exempt from tax
- Selling units before 12 months results in short term capital gain, taxed at 15%
- Investors must pay Securities Transaction Tax (STT) at 0.001% of the selling price when exiting the scheme
- Schemes investing 100% in foreign equities are not considered equity schemes for taxation and are subject to tax on long term capital gains
Mutual Fund Schemes (other than equity)
- These include debt funds, liquid schemes, gold ETFs, and short term bond funds
- Long Term Capital Gains (held for more than 36 months):
- Residents pay 20% with indexation benefit
- FIIs pay 10% without indexation benefit
- Short Term Capital Gains (held for less than or equal to 36 months) are taxed at the marginal rate of tax, with profit added to income
- Long Term Capital Gains (held for more than 36 months):
- If units are sold within 36 months, the gain is treated as short term capital gains, added to the investor's income, and taxed at their applicable tax slab, known as taxation at the marginal rate
- Long term capital gains for these funds arise when units are sold after 36 months
- Resident investors pay 20% (plus surcharge and cess as applicable) with indexation
- FIIs pay 10% basic tax (plus surcharge and cess as applicable) without indexation
Indexation Benefit
- Indexation adjusts for inflation to benefit investors
- It adjusts the purchase price of an asset to reflect inflation, reducing the capital gains tax
- The Central Government notifies the cost inflation index, used to calculate long term capital gains
Dividend Distribution Tax (DDT)
- Dividends from mutual funds are tax-exempt for investors
- Asset Management Companies (AMCs) pay DDT from distributable income for debt mutual funds
- No DDT is payable for equity funds
- Rates for DDT:
- Individuals and HUF: 25% (plus surcharge and cess)
- Others: 30% (plus surcharge and cess)
- Dividends to non-residents or foreign companies via an Infrastructure Debt Fund: 5% (plus surcharge and cess)
- Rates for DDT:
Fixed Maturity Plans (FMPs)
- FMPs are closed-ended debt funds with a specified maturity period
- Regulations ensure schemes diversify investments, limiting exposure to single securities
- Schemes cannot invest more than 10% of NAV in a single issuer's rated debt instruments, extendable to 12% with approval
- Investment in unrated paper of a single issuer cannot exceed 10% of NAV, with total unrated paper investment capped at 25% of NAV
- Money market instruments of an issuer are capped at 30% of investment for mutual schemes, excluding investments in government securities
- Investment in equity shares of any company is capped at 10% of investment for mutual schemes, excluding investments in index funds
Other Regulations
- No fees are charged if a scheme invests in another scheme of the same or different AMC
- Aggregate inter scheme investment is capped at 5% of net asset value
- Investment in unlisted securities of its sponsor is prohibited for mutual schemes
- Total exposure of debt schemes in a particular sector cannot exceed 25%
Association of Mutual Funds in India (AMFI)
- The industry association for mutual funds in India, founded in 1995
- Objectives:
- Promote mutual fund interests and interact with regulators
- Maintain ethical and professional standards
- Increase public awareness and provide information
- Develop trained distributors and implement training programs
- Objectives:
Product Labeling
- Funds are labeled based on risk level, represented pictorially using a ‘riskometer’
- Risk Level:
- Low - principal at low risk
- Moderately Low - principal at moderately low risk
- Moderate - principal at moderate risk
- Moderately High - principal at moderately high risk
- High - principal at high risk
- Risk Level:
Systematic Investment Plan (SIP)
- Enables regular monthly investments, benefiting from market fluctuations
- Averages the cost of units, reducing risk
- SEBI has eliminated PAN requirements for micro SIPs (investments up to Rs. 50,000/- in a financial year)
Systematic Transfer Plan (STP)
- Transfers funds from one scheme to another at regular intervals
- Involves moving a lump sum into a liquid fund and then transferring fixed amounts to another scheme regularly
Systematic Withdrawal Plan (SWP)
- Allows investors to withdraw a fixed sum regularly from a lump sum investment
Investment Options
- Choice between dividend payout, dividend reinvestment, and growth
- Growth Option:
- Focuses on capital appreciation
- No regular income or additional units are provided
- Dividend Payout Option:
- Provides regular income
- Results in cash outflow and reduces NAV, will receive dividend
- Dividend Reinvestment Option:
- Reinvests dividends, may get slightly lesser number of units
- Provides more units but reduces NAV
- Growth Option:
- Equity schemes have no Dividend Distribution Tax which is unlike debt schemes
- Dividend Payout does not offer benefits of how compounding increases return from investment
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Description
This lesson covers the tax implications of investing in equity schemes in India according to SEBI regulations. It includes topics such as minimum investment percentages, long-term and short-term capital gains tax, and securities transaction tax (STT). Additionally, it touches on regulations related to investments in debt instruments.
