InvestorQ : Are the special concessions for short term capital gains on equities applicable to equity funds too?
Dia Deshpande made post

Are the special concessions for short term capital gains on equities applicable to equity funds too?

Answer
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Ria Jain answered.
1 year ago


As we are aware, an equity fund is one that has an exposure of more than 65% of its AUM to equity assets. There is a separate concessional tax treatment in case of equity funds compared to debt funds. Equity funds are treated at par with direct equities for treatment of tax calculation on capital gains. Assume that Ram is a salaried employee of a PSU unit. In the month of December, 2017 Ram had purchased 200 units of AXA Mutual fund @ Rs. 100 per unit. The mutual fund is an equity oriented mutual fund with 75% exposure to equities as per the extant SEBI definition. These units were sold in BSE in August, 2018 @ Rs. 125 per unit (securities transaction tax was paid at the time of sale). What will be the nature of capital gain in this case?

In the above case, Ram had purchased units in December, 2017 and the same were sold in August, 2018, i.e., sold after holding them for a period of less than 12 months and, hence, the gain will be short-term capital gain. Section 111A is applicable in case of STCG arising on transfer of equity shares or units of equity oriented mutual-fund or units of business trust which were transferred on or after 1-10-2004 through a recognised stock exchange and such transaction was liable to securities transaction tax. In case of equity funds it needs to be remembered that even if the funds were not sold through the stock exchange mechanism, still all equity fund redemptions are subjected to STT, which makes it eligible for classification as equity under Section 111A of the Income Tax act.

If the conditions of section 111A are satisfied then the STCG is termed as STCG covered under section 111A. Such a gain is charged to tax @ 15% (plus surcharge and cess as applicable). In the given case, mutual fund is an equity oriented mutual and fund, the units are sold after holding them for less than 12 months, units are sold through recognised stock exchange and the transaction is liable to STT, hence, the STCG can be termed as STCG covered under section 111A. Such STCG will be charged to tax @ 15% (plus surcharge and cess as applicable). It needs to be noted here that if the units were redeemed with the fund, it would still qualify as STCG but the STT will be deducted by the fund at the time of redemption of the units of the fund.