Everything You Must Know About Taxation on Mutual Funds in 2021

by 5paisa Research Team 30/09/2021

The COVID-19 pandemic was a spirit dampener across the globe, but the timely actions and policies of the government have brought India's development trajectory back on track. And since the capital markets react to positive news faster than anything else, the stock market's meteoric rise is a testament to India's fascinating story.

AMFI's data shows that the Indian mutual fund industry's Assets Under Management (AUM) soared to a record INR 36.59 trillion in August 2021 compared to a measly INR 6.97 trillion a decade ago.

Since mutual funds are typically more tax efficient than fixed deposits and safer than stocks, it's no surprise that Indian investors are making a beeline for these high-return investment instruments. 

If you plan to invest in mutual funds or already hold units, you need to know the tax implications. Scroll down to learn about the tax on mutual funds an investor might have to pay on their investments.

How Do You Earn from a Mutual Fund?

Before understanding the tax implications, you should know how investors earn money from mutual funds. 

Generally, you can earn from a mutual fund in two ways:

i) Capital Gains (or loss)
ii) Dividends

1. Capital Gains (or Loss)

Capital gain or loss refers to your investment's profit or loss should you sell your mutual fund units. Let's understand this with an example. 

Suppose you invest INR 10,000 in the XYZ fund and receive 100 units in your account. After one year from the investment date, you find that your account value has grown to INR 15,000. If you want to sell your 100 units then, it will be termed as Capital Gains. Conversely, if the fund value reduces to INR 9,000, it will be called Capital Loss.

The Short-Term Capital Gains Tax (STCG) applies on withdrawals before twelve (12) months from the investment date for equity and balanced schemes and thirty-six (36) months for debt schemes. For withdrawals made after 12 or 36 months from the investment date, the Long-Term Capital Gains Tax (LTCG) applies. The STCG is usually 5% higher than the LTCG.

This table will tell you all about long-term and short-term capital gains:
 

Fund Type

Short-Term

Long-Term

Equity (where the exposure to equity is more than 65%)

Less than 12 months

More than 12 months

Balanced Funds (where the exposure to equity is more than debt)

Less than 12 months

More than 12 months

Debt Funds (where the exposure to debt is more than 65%)

Less than 36 months

More than 36 months

 

2. Dividend

Companies often issue interim and final dividends when their profit margin increases. Some companies even distribute dividends when their profit hasn't beat the company estimates. They do so to retain loyal investors. Dividend-focused investors invest in such companies to get handsome dividends periodically. 

Until March 2020, the dividend issuer had to pay taxes, known as the DDT or Dividend Distribution Tax, every time they released dividends. However, in Budget 2020, the central government declared that the dividend issuer would not have to pay taxes on the dividend. Instead, the dividend income will be added to the investor or unit holder's taxable income and taxed accordingly. 

So, as an investor in the financial year 2021-22, you have to include the dividend income in your net income and calculate the taxes correctly. So, if you fall in the highest income bracket, your tax liabilities will increase further. The possibility of a higher tax has also prompted many investors to switch to 'Growth' schemes offered by mutual funds. 

Now that you know how mutual funds generate income and how the dividend is taxed let's shift our focus to understanding the tax implications on Capital Gains.  

Taxation on Mutual Fund Capital Gains

As already discussed, mutual fund capital gains are taxed in two ways:

i) LTCG
ii) STCG

The following sections describe each of these taxes in detail.

1. Long-Term Capital Gains Tax (LTCG)

For standard equity mutual funds, the LTCG is exempt on an income of up to INR 1 lakh every financial year. But, if the LTCG exceeds INR 1 lakh in a financial year, you will have to pay a tax of 10% without indexation.

In contrast, if you invest in a debt scheme, the LTCG applies on withdrawals after 36 months. The rate will be 20% after indexation. You might also have to pay the cess and surcharge.

Now, you can invest in a special type of mutual fund to save taxes - The Equity-Linked Savings Scheme or ELSS. By investing in ELSS, you become eligible to claim tax deductions of up to INR 1.5 lakhs under Section 80C. But, ELSS schemes come with a lock-in of three years. If you withdraw before three years, the tax benefits might be reversed. The tax rate is 10% for any income above INR 1 lakh a financial year.

What is Indexation?

Indexation refers to the process of recomputing the purchase price of a mutual fund after factoring in the inflation index and making adjustments. Generally, the Income Tax Department publishes the inflation index after evaluating various macroeconomic parameters. Depending on the inflation index, your effective capital gains might be lower after indexation.

2. Short-Term Capital Gains Tax (STCG)

Short-term capital gains are usually taxed at 15%. STCG applies when you sell units before one year from the investment date (for equity funds) and three years from the investment date (for debt funds). 
Hence, if you fall in the 30% tax bracket and sell the units before 12 or 36 months, you will be taxed at the rate of 30%.

Do You Have to Pay Any Other Tax When Selling Mutual Fund Units?

Besides LTCG, STCG, and tax on dividends, you may also have to pay a Securities Transaction Tax (STT), currently 0.001% of the value of the sold units. But, the STT applies only to equity or balanced funds and not to debt funds.

The Endnote

5paisa can be your go-to destination for everything related to mutual funds and stocks. Follow this link to improve your knowledge of the capital markets and make consistent profits.
 

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Invesco Approaches NCLT to Call EGM for Change of Zee Board

Invesco Approaches NCLT to Call EGM for Change of Zee Board
by 5paisa Research Team 30/09/2021

In an interesting development, the largest shareholder of Zee Entertainment, Invesco Fund, has moved the National Company Law Tribunal (NCLT). It has asked the NCLT to intervene and instruct the Zee board to call an Extraordinary General Meeting (EGM) to decide on the future composition of the board post the merger with Sony Pictures.

Invesco holds 18% in Zee Entertainment, while the Subhash Chandra family holds just about 3.44% pre-merger. Invesco had earlier sought the removal of Punit Goenka from the post of MD & CEO of Zee Entertainment. Just a week later, Zee Entertainment announced a merger with Sony Pictures with an agreement that Punit Goenka would continue for 5 years.

Invesco has made Punit Goenka, Zee chairman R Gopalan and independent director Vivek Mehra respondents to the petition. The matter will be heard by the NCLT today i.e. 30-Sep. Invesco had two demands. Firstly, it wanted Punit Goenka and 2 other directors to be moved out. Secondly, it wanted to nominate its own set of 6 directors on the board of Zee.

Check :- Invesco wants EGM to Replace Punit Goenka from the Post of MD & CEO

In response, the two directors; Manish Chokhani and Ashok Kurien, resigned from the board but Punit Goenka was reappointed for a period of 5 years as part of the merger deal with Sony Pictures. Invesco wants the new board, consisting of 6 of its nominees, to take a final call on the Sony Pictures merger, purely on the merits of the case.

One of the concerns for Invesco is that the merger will dilute the stake of Zee shareholders in favour of Sony Pictures shareholders, since the merger is in the ratio of 47: 53. This would also result in Invesco Fund having a much lower stake in the merged entity. A couple of years back, the Subhash Chandra family had lost control of Zee and was reduced to just 3.44%, after these shares had been pledge for loans to group companies.

The Subhash Chandra family is likely to end up with enhanced stake in the merged entity due to the 2% stake that Sony will forfeit to the ex-promoters as part of non-compete clause.

Also Read:-

What does the Zee merger with Sony mean

 

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List of Upcoming IPOs in October 2021

List of Upcoming IPOs in October 2021
IPO
by 5paisa Research Team 30/09/2021

Year 2021 has been the year of the IPOs. In the first 9 months of the year, a total of 44 IPOs hit the market (including the IPO of Aditya Birla Sun Life currently open). These 44 IPOs raised Rs.78,520 crore. This includes two non-equity IPOs of Brookefield REIT and the PowerGrid INVIT. Even if these two are excluded, the total IPO collections in 2021 so far would still stand at over Rs.67,000 crore. However, this could just be the start.

How IPOs are likely to pan out in October 2021?

October 2021 is likely to be a busy month for IPOs. While actual IPO announcements will be coming, early indications from investment bankers, indicate the following IPOs likely to hit the market in October 2021.The IPO list is broken up sector-wise.

Upcoming IPOs in October 2021

Company Name

IPO Size (Estimated)

IPO Month

PHARMACEUTICALS

Emcure Pharmaceuticals

Rs.4,500 Crores

Oct-21

DIGITAL PLAYS

Nykaa

Rs.4,000 Crores

Oct-21

MobiKwik

Rs.1,900 Crores

Oct-21

Ixigo

Rs.1,600 Crores

Oct-21

RateGain Travel Technologies

Rs.1,200 Crores

Oct-21

FINANCIAL SERVICES

Star Health And Allied Insurance Co. Ltd.

Rs.3000 Crores

Oct-21

Arohan Financials

Rs.1,800 Crores

Oct-21

Northern Arc Capital

Rs.1,800 Crores

Oct-21

Utkarsh Small Finance Bank

Rs.1,350 Crores

Oct-21

Fincare Small Finance Bank

Rs.1,330 Crores

Oct-21

ESAF Small Finance Bank Ltd

Rs.998 Crores

Oct-21

INFRASTRUCTURE PLAYS

Penna Cement

Rs.1,550 Crores

Oct-21

Sterlite Power Transmission

Rs.1,250 Crores

Oct-21

Shri Bajrang Power And Ispat

Rs.700 Crores

Oct-21

OTHERS

CMS Info Systems

Rs.2,000 Crores

Oct-21

Shriram Properties

Rs.800 Crores

Oct-21

Studds Accessories Limited

Rs.450 Crores

Oct-21


The month of October is expected to collect over Rs.30,000 crore and there is another Rs.20,000 crore of IPOs expected in November. These exclude the mega Rs.16,600 crore IPO of Paytm or the Rs.75,000 crore LIC IPO. Year 2021 would then end up being the best year for IPOs, bettering the previous record of the year 2017. Here is a quick update on the IPOs above Rs.1000 crore to hit market in October 2021.

Emcure Pharmaceuticals

The Rs.4,500 crore IPO will comprise of a fresh issue of Rs.1,100 crore and an offer for sale of Rs.3,400 crore. The company focuses on generics and active pharma ingredients and will use the fresh issue component to repay debt.

Nykaa

The Rs.4,000 crore IPO will comprise of a fresh issue of Rs.525 crore and an offer for sale of Rs.3,475 crore. Floated by former Kotak investment banking honcho Falguni Nayar, Nykaa is an online platform for fashion products. It is a unicorn and also profitable.

MobiKwik

The Rs.1,900 crore IPO will comprise of a fresh issue of Rs.1,500 crore and an offer for sale of Rs.400 crore. The company will use the fresh funds to spruce up its digital wallet and expand its franchise of merchants and customers.

Ixigo

The Rs.1,600 crore IPO will comprise of a fresh issue of Rs.850 crore and an offer for sale of Rs.750 crore. It is one of the few artificial intelligence based platforms for booking flights, trains and hotels and has been around for over 14 years now.

Rategain Travel Technologies

The Rs.1,200 crore IPO will comprise of a fresh issue of Rs.400 crore and an offer for sale of Rs.800 crore. It services marquee clients with data centres based on AI. Rategain is a subsidiary of Rategain UK and will use the funds to repay debt and deleverage.

Star Health Insurance

The Rs.3,000 crore IPO will comprise of a fresh issue of Rs.2,000 crore and an offer for sale of Rs.1,000 crore. Star Health is a leading health insurance provider and is backed by marquee investors like Rakesh Jhunjhunwala and Westbridge Capital.

Arohan Financials

The Rs.1,800 crore IPO will comprise of a fresh issue of Rs.950 crore and an offer for sale of Rs.850 crore. Arohan is an NBFC and is also into microfinance serving the unpenetrated segments of the market. The IPO will help boost its capital adequacy.

Northern Arc Capital

The Rs.1,800 crore IPO will comprise of a fresh issue of Rs.300 crore and an offer for sale of Rs.1,500 crore. Northern Arc is also an NBFC and will look at the fund raising to boost its capital adequacy and expand lendable resources.

Utkarsh Small Finance Bank

The Rs.1,350 crore IPO will comprise of a fresh issue of Rs.700 crore and an offer for sale of Rs.650 crore. The company is an SFB based out of Varanasi and is very strong in Uttar Pradesh, Uttarakhand and Bihar belt. IPO will be used to boost capital adequacy.

Fincare Small Finance Bank

The Rs.1,330 crore IPO will comprise of a fresh issue of Rs.1,330 crore and an offer for sale of Rs.1,000 crore. The small finance bank will use the proceeds of the fresh issue component to augment its tier-1 capital and improve its lendable resources.

Penna Cement

The Rs.1,550 crore IPO will comprise of a fresh issue of Rs.1,300 crore and an offer for sale of Rs.250 crore. This is the second attempt of this Hyderabad based cement company and will be used to reduce debt and for expansion.

Sterlite Power Transmission

The Rs.1,250 crore IPO will comprise of a fresh issue and is part of the Vedanta group. Sterlite Power owns and manages power transmission assets and these are spread across India and Brazil.

CMS Info Systems

The Rs.2,000 crore IPO will comprise predominantly of an OFS as its 100% owner Sion Investments will look to monetize part of the holdings. CMS is into cash management services and predominantly into ATM management services.

Also Read:-

List of Upcoming IPOs in 2021

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Birla Corp to Double Cement Capacity to 30 MT by 2027

Birla Corp to Double Cement capacity to 30 MT by 2027
by 5paisa Research Team 30/09/2021

Birla Corp, the cement business of the MP Birla group, plans to undertake a massive expansion plan to double its cement manufacturing capacity to 30 million tonnes per annum (MTPA) by the year 2027. Its current cement capacity is 15.6 MTPA. Birla Corp is headed by Harsh Lodha and that had been a major bone of contention between the Birla family and Harsh Lodha after he claimed that MP Birla had bequeathed the business to him.

The expansion will happen in phases. In the first phase, the cement capacity will be enhanced from 15.6 MTPA to 20 MTPA by the end of the year 2021. This will be boosted by the 3.90 MTPA greenfield cement plant at Mukutban near Nagpur going on stream. Originally, the eventual target was only to reach 25 MTPA by 2025. However, that target has been expanded to 30 MTPA by the year 2027 due to higher demand visibility.

Birla Corp currently operates 10 cement plants across India  and some of its recent plant additions have much better efficiency and profitability compared to the legacy plants. For example, the Reliance Cement plant that Birla Corp acquired in the year 2016 is among the most efficient and profitable in India on operating parameters. The idea of this aggressive expansion is to become a more meaningful player in the Indian cement space.

Indian cement companies have seen solid demand and price traction in the last few quarters, which his also evident in the quarterly numbers. However, consolidation and national presence are the key. At 30 MTPA, Birla Corp would still be just one-fourth the size of Ultratech which has a cement capacity of 116 MTPA. Some of the top cement companies in India in terms of manufacturing capacity include Ultratech, Shree Cements, Ambuja/ACC and Dalmia Cements.

Read:- Shree Cements Plans Mega Capacity Expansion

Cement may have perpetual demand but cement companies do well when there is pricing power. Due to a spike in infrastructure spending and a likely turnaround in housing demand, cement demand is likely to take off and prices are expected to be robust. The time is clearly ripe for a massive capacity expansion spree.

Also See:- Sector Update - Cements

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Grey Market Premium of Paras Defence & Space Technologies IPO

Grey Market Premium of Paras Defence & Space Technologies IPO
IPO
by 5paisa Research Team 30/09/2021

The Rs.170.78 crore offer for sale of Paras Defence & Space Technologies consisted of a fresh issue of Rs.140.60 crore and an offer for sale of Rs.30.18 crore. The issue had been priced in the band of Rs.165 to Rs.175 per share. The issue had closed for subscription on 23-Sep and the basis of allotment had been finalized on 28-Sep.

With demat credits to eligible shareholders on 30-Sep, Paras Defence is slated to get listed on the bourses on 01-October, Friday. Ahead of listing, one of the key parameters of evaluating the potential listing is the GMP or the grey market price.

It must be remembered that the GMP is not an official price point, just a popular informal price point. However, in most cases, it has proved to be a good informal gauge of demand and supply for the IPO. Hence it also gives a broad idea of how the listing is likely to be and how the post-listing performance would be.

While the GMP is just an informal approximation, it has been generally observed to be a good mirror of the real picture. More than the actual price, it is the GMP trend over time that matters.

One of the key factors that impacts the GMP in most of the cases, is the extent of oversubscription. Now, Paras Defence & Space Technologies IPO was oversubscribed a whopping 304.26 times overall. On a granular basis, it was the HNI segment that led the way with 927.70X subscription while QIBs were 169.65X and Retail was 112.81X. That has surely made the GMP premiums very robust in the informal trading market.

Check:- Paras Defence & Space Technologies IPO Subscription Day 3

As per updates on Thursday, 30-Sep, the Paras Defence & Space Technologies IPO is commanding a premium of Rs.235 over the issue price in the grey market. The GMP has been steady in the range of Rs.200 to Rs.235 over the last 10 days. 

The GMP did open at around Rs.160 but soon soared above Rs.200 and has held there ever since. That was expected after the sterling response to the Paras Defence IPO and robust oversubscription that the issue received.

The current GMP translates into a 134.29% premium over the upper band of the issue price of Rs.175. Also, it hints at a listing price of approximately Rs.410 when the stock lists on Friday 01-Oct. Of course, subsequent price performance will depend on HNI selling, since funded applications were quite high.

Also Read:-

1) Paras Defence IPO - 7 things to know

2) Upcoming IPOs in 2021

3) List of Upcoming IPOs in October 2021

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Lava International Files DRHP for Rs.1,500 crore IPO

Lava International Files DRHP for Rs.1,500 crore IPO
IPO
by 5paisa Research Team 30/09/2021

One of India’s homegrown mobile phone manufacturers, Lava International, plans to hit the IPO market and has already filed the draft red-herring prospectus with SEBI. The next steps will be undertaken after SEBI approves the DRHP and gives its observations. Lava sells mobiles and other electronic accessories under the brands of LAVA and XOLO.

The IPO will comprise of Rs.500 crore by way of fresh issue. The balance will be an offer for sale of 4.373 crore shares by the existing promoters and some early investors in the company. While three of the promoters will be offering shares in the OFS, there will also be participation in the OFS from Unic Memory Technologies and Tupperware Kitchenware.

The proceeds of Rs.500 crore from the fresh issue component will be utilized for 3 demarcated purposes. Rs.100 crore will be allocated for marketing and brand building while Rs.150 crore will be set aside for inorganic acquisitions and strategic partnerships. The company will use another Rs.150 crore to invest in subsidiaries to fund their working capital.

Lava International manufactures, distributes and services mobile handsets, tablets and other electronic accessories. Despite having a manufacturing capacity of 42.52 million handsets at Noida, Lava is more into marketing products of other originators. For example, Lava has licensing agreements with Lenovo and Nokia to distribute their handsets and also handle the post-sale servicing.

Apart from manufacturing handsets, Lava also offers its mobile handset solutions to other OEM players. These solutions encompass sourcing, design, manufacture, quality testing, embedding of software as well as distribution. This has emerged as the new growth area and Lava wants to be fully prepared for the opportunities opened by the Make in India campaign.

For the fiscal year ended March 2021, Lava announced total revenues of Rs.5,513 crore and net profits of Rs.173 crore. In the outsourcing business 2-3% net margin is the norm. Profits were up almost 66% on a YoY basis for FY21.
 

Also Read:-

List of Upcoming IPOs in October 2021