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Saturday, July 19, 2014

Implications of Budget on Debt MFs like FMP,Bond Funds,Cash Funds‏

Finance Minister in his maiden budget has proposed changes in the treatment of tax on dividend distributed and the capital gains arising from sale of Debt Mutual funds like FMP, Bond Funds, Income and Cash Funds etc. Following are the changes and its implications.
Dividend Distribution Tax (DDT)
DDT was applied on net dividend paid out, at 28.33% (25% DDT+cess+surcharge) and hence the effective tax used to be 22.08%. Going forward this rate will apply on gross basis making the actual and effective rate same i.e. 28.33%. The impact is described in the example below.
Impact of change
Currently
After the effective date
Amount of Dividendhttp://content.icicidirect.com/mailimages/Rupee_13px.gif
100
100
Rate of DDT
28.33%
28.33%
Pay out to Investor http://content.icicidirect.com/mailimages/Rupee_13px.gif
77.92
71.67
Amount of Tax Payout http://content.icicidirect.com/mailimages/Rupee_13px.gif
22.08
28.33
Effective Rate of DDT
22.08%
28.33%
As a result the net dividend payout to you as an investor from Debt Mutual funds would reduce going forward. However, the effective tax rate would still be lower as compared to the highest tax bracket of 30%.
Capital Gains Tax
The choice of paying taxes at 10% without indexation on LTCG is no longer available. LTCG from non-equity oriented funds would be taxed at 20% with indexation.
Click here(SEE BELOW B ) to know more about the impact arising due to this change.
Holding Period
In order to get  any benefit of long-term capital gain (LTCG), Investors will have to hold a debt fund for 36 months instead of 12 months. This means debt funds with investment period less than 36 months, redeemed after the effective date of the finance bill, will be treated as short-term capital gain (STCG) and no longer be eligible for indexation benefits, or lower long-term capital gains tax. The redemption proceeds will be subject to tax at the marginal rate of tax of the investor (nil, 10%, 20% or 30% as the case may be, plus surcharge and cess).
Tax Rate
All tradable NCDs and Bonds listed on exchange will have no impact due to these changes and will continue to have same tax treatment going forward i.e. they will be eligible for long term capital gains post a holding period of 12 months.
The effective date for these changes is yet to be confirmed by the ministry of finance and we will keep you informed as soon as the effective date is announced.
Best regards,
Vineet Arora
Head - Products and Distribution
ICICI Securities 19/7/2014

 (Received thru RB KISHORE)
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