Dalal & Broacha Stock

Broking Pvt Ltd.

Budget and its impact on MF Industry



July 12, 2014





The Finance Minister Mr. Arun Jaitley presented the union budget on July 10, 2014. He has proposed certain
changes related to the mutual fund industry which is highlighted as follows along with its impact:

Long Term Capital Gains on non-equity mutual funds

Earlier for any share held in a company, any other security that is listed in a recognized stock exchange in
India or units of Unit Trust of India or units of mutual funds or zero coupon bonds, the period of holding to
qualify for short term capital asset was 12 months.

In this union budget of FY14 15, it is proposed to amend this holding period wherein an unlisted security
and units of mutual fund (other than an equity oriented mutual fund) shall be a short term capital asset if it
is held for less than 36 months. Non-equity mutual funds will include all debt mutual fund schemes, fund of
fund schemes, foreign funds and gold funds.

These amendments will take effect from April 01, 2014.

Implications: Thus as per this proposed change in the holding period, any sale of non-equity mutual fund
schemes within 36 months of purchase will be treated as short term capital gain.

Since this is with effect from April 01, 2014, any FMP of less than 3 years that has matured in or is maturing
in this financial year (i.e. from April 01, 2014 March 31, 2015) will be treated as short term capital gain.
The same would also apply to any redemption made in non-equity mutual fund schemes.

Also in case where a corporate has redeemed any non-equity mutual fund schemes (including FMPs) in the
first quarter of this financial year and has taken the gains into consideration while filing the advance tax, the
same will have to be revised as per the new provision.

Tax on long term capital gain on non-equity mutual funds

Earlier the investor of non-equity mutual funds had two options to compute long term capital gain tax
arising from sale of units. Either take the tax rate at 10% (+ surcharge + education cess) without indexation
benefit or 20% (+ surcharge + education cess) with indexation benefit.

It is now being proposed to remove the 10% tax rate with effect from April 01, 2014.

Implications: Thus investor will have to compute long term capital gains on sale of non-equity mutual fund
units at 20% (+surcharge + education cess) with indexation benefit only.

Dividend Distribution Tax

A domestic company was liable to pay tax at the rate of 15% being Dividend Distribution Tax by the company
on any amount declared, distributed or paid by way of dividends to its shareholders.

Dividend declared by mutual fund houses on non-equity mutual fund schemes were taxed as Dividend
Distribution Tax by the fund houses at the rate of 28.3250% (25% base rate + 10% surcharge + 3% education
Dalal & Broacha Stock
Broking Pvt Ltd.
Budget and its impact on MF Industry



July 12, 2014




cess) for individual and 33.99% (30% + 10% Surcharge + 3% education cess) for corporates on the net
amount.

The dividends in the hands of the investors/shareholders were tax free.

It is now being proposed to increase the Dividend Distribution Tax by charging the same on the gross
amount and not net amount.

For example: Where the amount of dividend paid by a company is Rs 85, then DDT under the amended
provision would be calculated as follows:

Dividend amount distributed = Rs. 85
Increase the amount to gross level [i.e. (85*0.15)/(1-0.15)]
Gross amount = Rs. 100
DDT @ 15% of Rs. 100 = Rs. 15
Tax payable is Rs. 15
Dividend distributed to shareholders = Rs. 85

However the DDT will continue to be paid by the mutual fund houses and/or domestic companies and
dividends in the hands of the investor would still remain tax free.

These amendments on DDT will be applicable from October 01, 2014.

Raising the limit of deduction under section 80C

Under the existing provision of section 80C an individual or Hindu Undivided family is allowed a deduction of
Rs 1 Lac for investments made in the previous year in certain specified instruments like Public Provided
Fund, Life Insurance, Equity Linked Savings Schemes (ELSS) and so on.

It is now being proposed to increase the limit of above eligible investments to Rs 1.50 Lacs. This change is
applicable for investments made from April 01, 2014.



Disclaimer: This document has been prepared and compiled from reliable sources. While utmost care has been taken to ensure that
the facts stated are accurate and opinions given are fair and reasonable, neither the Company nor any of its Directors, Officers or
Employees shall in any way be responsible for the contents. The Company, its Directors, Officers or Employees may have a position or
may otherwise be interested in the investment referred in this document. This is not an offer or solicitation to buy, sell or dispose off
any securities mentioned in this document.

Report Prepared by: Mrs. Pooja Shah / Mrs Mona Birani

For Further details contact: Mr. Mahendra Panikkar / Mr. Bimal Batavia / Mr. Tiwari / Mr.Navish Bangera /
Mr. Javed Ansari / Ms. Mita Sanghvi / Ms. Bijal Sanghvi

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