Photo: iStock
Photo: iStock

Redemption or switching of holdings in debt funds can give rise to capital gains tax

Debt mutual funds are required to deduct Dividend Distribution Tax (DDT) and pay out a dividend net of the DDT to retail investors

How are debt fund investments taxed for retail investors?

—Katha Pal

Debt mutual funds are required to deduct Dividend Distribution Tax (DDT) and pay out a dividend net of the DDT to retail investors. You would therefore not be subject to tax in respect of the dividend received by you from the debt mutual fund. Any redemption or switch of the holding in the debt fund would give rise to capital gains tax. The gains are classified as short-term capital gains (STCG) and taxed at normal income tax slab rates, where the units of debt fund are held by you for 3 years or less. If these are held for more than 3 years, the resultant long-term capital gains (LTCG) are taxed at 20 per cent (with indexation benefit). For non-resident retail investors, such LTCG is taxed either at 20% (with indexation benefit) or at 10% (without indexation). Surcharge, as applicable, and cess would be payable in addition to the taxes in both case. Any loss from the redemption can either be set-off against capital gains arising during the year from other assets (but, long term capital loss can only be offset against LTCG from other long term capital assets). Any loss after such set-off can be carried forward for future offset against eligible gains from capital assets for up to 8 fiscal years, following the fiscal year in which the initial loss was incurred.

Two years ago I became a contract employee and my provident fund (PF) stopped. If I withdraw it, how will I be taxed?

—Drishya Pathak

It is presumed that you are an Indian citizen and hold an Indian passport. You are then eligible to withdraw funds in your PF account, if you have remained unemployed for at least 2 months after you have left your previous employment. Hence, you or your employer may have to check the applicability of PF even during the period you were a contractual employee.

Your PF fund accumulation will typically be treated as exempt when withdrawn, if you have rendered services continuously with the employer for at least 5 years or more. If you had transferred your PF balance from a prior employment into this PF account and the cumulative periods of service with both employers exceeds 5 years, the balance withdrawn, including any interest earned in your account until the date of your retirement, could be claimed exempt from tax. The same would need to be disclosed in your tax return under the exempt income schedule.

Any interest earned by you after the date of your retirement would be taxable, as per a recent judicial precedent. 

If you withdraw your PF, having contributed for less than 5 years, the withdrawal is taxable. The interest attributable to the employee contribution to PF shall be taxed as “income from other sources". Employer’s contribution to PF and interest attributable to the employer contribution are taxable as salary. Further, the employee contribution to PF, to the extent a deduction has been claimed in past years under section 80C, shall also be taxed as salary. 

I plan to buy a house in 2018 using a home loan. What tax benefits are available to me on this?

—Natasha Bhatia

The tax benefits for repayment of a home loan can be availed only after you have taken possession of the house in question and would also depend on the nature of use of the house (self-occupation versus letting it on rent) and number of houses you own. 

Under the current tax laws, you can claim a deduction for repayment of the principal portion of a home loan, subject to a cap of Rs1.5 lakh a year under section 80C of the Income-tax Act 1961, Act.

You can also claim a deduction for the interest paid or payable in each financial year as well as any interest paid by you for the pre-construction period, commencing from the fiscal in which you acquired possession of the house. The pre-construction interest deduction can be claimed in five equal instalments. The overall deduction in respect of interest repayment is capped to Rs2 lakh, if the house is self-occupied. If the house is let-out or deemed to be let-out (in case of more than one property being self-occupied), the interest can be fully offset from the net taxable rental value (determined after reducing municipal taxes from the gross rental value of the house and the standard deduction of 30% of the net rental value (gross rent less municipal taxes)). 

Once the income or loss from the house has been determined, as above, the resultant net loss, if any, should first be offset against any other income you earn from other house property owned by you. The remaining loss can be offset to the extent of Rs2 lakh against your other income (salary income or business income or income from other sources) for the given fiscal. Any unadjusted loss from house property can be carried forward and set-off against house property income in the eight successive future fiscals.

Further, depending on your income, you may need to disclose the purchase of house property (in India) in your tax return in schedule AL.

Parizad Sirwalla is partner (tax), KPMG.

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