Q1) Dear Subbu Sir, If I incur a loss in my stocks, can the losses be adjusted against profits from mutual funds?
A) Please refer to the table below to understand the methods to set off your losses.
| Capital Gains | Time Frame | Set Off Type | Assets used to Set-Off | Conditions |
| Short Term Capital Losses (STCL) | Assets are known as short-term if they are held for less than a year. | STCL from sale of shares or units of equity MFs with STT paid can be adjusted against Short Term Capital Gains (STCG) | STCL can be set off against capital gain from investments of other Stocks and Mutual Funds, Debt and Gold ETFs, Real Estate, Physical Gold and Silver | STCL can be set off against any capital gain (Long-term or Short-term) from investments of other Stocks and Mutual Funds, Debt and Gold ETFs, Real Estate, Physical Gold and Silver |
| Long Term Capital Losses (LTCL) | Assets are known as long-term if they are held for more than a year. | LTCL from sale of shares or units of equity MFs with STT paid can be adjusted against Long Term Capital Gains (LTCG) | LTCL can only be set off against long term capital gains from investments of other Stocks and Mutual Funds, Debt and Gold ETFs, Real Estate, Physical Gold and Silver | LTCG on shares where STT is paid is exempt from income tax. Hence, both LTCL and STCL cannot be set off against LTCG.* |
*Eg: If you purchased 2 shares A and B as long-term investments. Suppose Share A incurred a loss of Rs. 100 and Share B received gains of Rs. 200. If you sell Share B with LTCG (Rs. 200) and paid the applicable STT, you cannot set off the gains from Share B for the losses in Share A.
You also have the choice to carry forward your losses and set them off against future profits for up to eight financial years. Remember that the sale of stocks and funds is on a first in, first out basis i.e. the shares you bought first will be sold first, followed by other funds/stocks.
Q2) Will units of Mutual Funds be chargeable in Wealth Tax? Also, what are the tax implications on dividends from mutual funds?
No, under the Wealth Tax Act, mutual fund units are exempt from Wealth Tax.
Currently, there is no tax on dividends from equity mutual funds since the Dividend distribution tax is already paid by the mutual fund company that declares a dividend.
Q3) Sir, I am currently drawing a salary of 20,000 per month, of which I would like to invest at least 5000 per month into some mutual funds through SIP. I would also like to save on my taxes while making such an investment. Please suggest good funds for saving taxes.
A) Before investing in any mutual fund, consider the following aspects which will help you make sensible investment decisions:
Your age
Current Income
Your Financial goals
Risk appetite
We assume that you are a young investor and hence your willingness to take risk is high with a long-term financial goal.
At this time, an ELSS mutual fund would be an ideal investment option since you can avail a tax benefit under section 80C of the Income Tax Act, 1961. ELSS are diversified equity funds and have a compulsory lock-in period of 3 years (which is beneficial for you since you have a long term outlook towards your investments).
However, please note that in case you plan to start an SIP for an ELSS, each SIP installment has to complete the 3 years lock-in period.
To select a good ELSS, ensure that its objectives meet your financial goals and has a consistent track record. You could always do a background check of the preferred fund houses to understand their investment process and style of investment so that it meets your investment style.
The above assumes your desire to invest in equity funds. However, if you were to invest in debt funds, then it is advisable to invest in a liquid fund instead. Liquid funds are more appealing since the tax levied by these funds on capital gains is much lower than that of FDs.
Let us look at an example that compares Liquid Funds (Dividend Plan) with Fixed Deposits:
| Tax Treatment for Dividend Plans | Fixed Deposits | Liquid Funds (&) |
|
| Dividend Plan |
| Assumed Annual Returns | 9.00% | 8.74% |
| Effective Taxation * + | 30.31% | 21.28% |
(* - For Savings and Fixed Deposits, taxation is assumed at the highest slab of 30% along with surcharge and education cess)
(+ For dividend plan, dividend distribution tax (DDT) is 25% plus surcharge and education cess, the rate mentioned is the effective applicable rate of DDT)
(For growth plans, the applicable tax is Capital Gains tax; Short Term Capital gains tax is at the marginal tax rate of the investor. Long Term Capital Gains are taxed at 10% w/o indexation and 20% with indexations plus applicable education cess)
Note: The instruments illustrated above are different in nature having different risk factors and the comparison is given for the purpose of general understanding only.
** Source for Liquid Funds: Valueresearchonline.com. Open Ended: Debt Liquid Return Averages. Data as on Feb 02, 2012.Source for Fixed Deposits: Fixed.deposits.org
The DDT rate is 21.28% and not 25% because you are receiving the dividend distributed part of the investment (e.g. Rs. 80 out of Rs. 100).
Had you opted for a growth option, you would have to pay Rs 25 (25% excl Cess + Surcharge on Rs 100) as tax, which turns out to be higher than the DDT on a dividend plan which is 21.28%. Since the Mutual Fund pays the tax on the investor's behalf, the effective rate in a dividend plans works out lower.
The dividend distribution tax (DDT) on liquid funds is 21.28% (excl Cess + Surcharge) whereas you may have to pay a tax of 30.31% on your interest from Fixed deposit.
If you compare the post tax returns in the table, Liquid Funds (Dividend Plan) at 6.88% give higher returns compared to Fixed Deposits at 6.27%.
Disclaimer:
Subbu's Solution is authored by I.V.Subramaniam. I.V.Subramaniam is a director of Quantum Asset Management Company Private Limited and Chief Executive Officer & Chief Investment Officer of Quantum Advisors Private Limited. The responses expressed here are the personal view of the author.The responses expressed here are strictly for information and explanation purpose only. The responses are meant for general reading purpose and not to be considered as an investment advice / recommendation. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall not be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in the responses.
Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Please visit - www.QuantumMF.com to read Scheme Specific Risk Factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the scheme's objective will be achieved and the NAV of the scheme(s) may go up or down depending upon the factors and forces affecting securities markets. Investment in mutual fund units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the Sponsor / AMC/ Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.