Easy methods to Pay ZERO Tax On Income Of Mutual Funds and Shares?

Easy methods to Pay ZERO Tax On Income Of Mutual Funds and Shares in India? Are there methods to keep away from tax legally on the income of Mutual Funds and Shares in India?

Current will increase in capital positive factors taxation have evidently drawn the eye of mutual funds and inventory traders. Whereas I don’t intend to query their motivations, it’s pertinent to discover methods for legally minimizing tax liabilities on income from mutual funds and shares in India, in addition to to guage whether or not these choices are worthwhile.

Easy methods to Pay ZERO Tax On Income Of Mutual Funds and Shares?

Earlier than talk about about this, allow us to first perceive the present taxation guidelines with respect to mutual funds and shares. I wrote an in depth put up on this after the Funds 2024. You’ll be able to discuss with the identical in “Funds 2024 – New Capital Acquire Tax Guidelines And Charges“.

Allow us to return to the first goal of this put up. Certainly, there are strategies to incur no tax on the income derived from mutual funds and shares in India. The method that’s at present being extensively mentioned entails Part 54F of the Revenue Tax Act.

The provisions of Sec.54F are as follows –

Exemption beneath Sec.54F is accessible if the next circumstances are glad.

• Who can declare exemption – Beneath Sec.54F, solely a person or a HUF can declare exemption. In different phrases, no different particular person is eligible for claiming exemptions beneath Sec.54F.
• Which asset is certified for exemption – Beneath Sec.54F, the exemption is accessible provided that the capital asset that’s transferred is a LONGTERM capital asset however OTHER THAN A RESIDENTIAL HOUSE or PROPERTY (it could be a plot of land, industrial home property, gold, share or any asset however not a residential home property).
• Which new asset needs to be bought or acquired – To assert the exemption beneath Sec.54F, the taxpayer must buy one residential home property (previous or new) (however have to be inside India) or assemble a residential home property (new home). The brand new home needs to be bought or constructed inside the time restrict – a) For brand spanking new home – It needs to be bought inside 1 yr or earlier than, or inside 2 years after, the date of switch of the unique asset. b) For developing a brand new home – The development needs to be accomplished inside 3 years from the date of switch of authentic asset.

Few factors to think about are –

1. Time restrict within the case of obligatory acquisition – In case of obligatory acquisition, the time restrict of 1 yr, 2 years, or 3 years can be decided from the date of receipt of compensation (whether or not preliminary or extra).
2. Development might start earlier than the switch of capital asset – Development of the home needs to be accomplished inside 3 years from the date of the switch of the unique asset. The date of graduation of development is irrelevant. Development even earlier than the switch of the unique asset.
3. Holding of authorized title isn’t needed – If the taxpayer pays full consideration or a considerable portion of it inside the stipulated interval given above, the exemption beneath Sec.54F is accessible even when the possession is handed over after the stipulated interval or the sale deed is registered afterward.
4. The residential home needs to be bought/acquired (might or might not be used for residential functions) – The requirement of Sec.54F is that the property needs to be a residential home. Using the property isn’t the related criterion to think about the eligibility for a profit beneath Sec.54F. What’s required is an funding in a residential home. Mere non-residential use wouldn’t render a property ineligible for profit beneath Sec.54F.
5. Funding within the identify of the transferor – It’s needed and compulsory to have an funding made in a residential home within the identify of the transferor solely and never within the identify of every other particular person.
6. Renovation or modification of an present home – Sec.54F doesn’t present for exemption in case of renovation or modification of an present home.
7. The funding made inside the time restrict however development not accomplished – Exemption beneath Sec.54F can’t be denied the place funding in a residential home is made inside the time restrict however development is accomplished after the expiry of the time restrict.
8. The dwell hyperlink between internet sale consideration and funding in new property isn’t needed – Merely as a result of capital positive factors earned have been utilized for different functions and borrowed are deposited in a capital positive factors funding account, the good thing about exemption beneath Sec.54F can’t be denied.
9. Not multiple residential home property needs to be owned by the taxpayer – Beneath Sec.54F, the exemption is accessible provided that on the date of switch of the unique property, the taxpayer doesn’t personal multiple residential home property. He also needs to not buy inside a interval of two years after such date (or full development inside a interval of three years after such date) any residential home.
10. The brand new asset needs to be located in India – As talked about above, the brand new asset needs to be inside India.
11. Joint possession in different properties – If the taxpayer owns multiple residential home even collectively, with one other particular person, the good thing about exemption beneath Sec.54F isn’t accessible.

How a lot most restrict can one avail beneath Sec.54F?

Earlier than the Funds 2023, there have been no such restrictions. Nonetheless, efficient from 1st April 2024, the utmost restrict accessible to avail of the profit beneath Sec.54F is capped at Rs.10 Crore. Do notice that the quantity of exemption can’t exceed the quantity of capital acquire.

What’s the Scheme of Deposit beneath Sec.54F?

Beneath Sec.54F, the brand new home might be bought or constructed inside the time restrict given above. The taxpayer has to submit his return of earnings on or earlier than the due date of submission of return of earnings (typically thirty first July or thirty first Oct of the evaluation yr). If the quantity isn’t utilized inside the due date of submission of earnings, then it needs to be deposited within the capital positive factors deposit account scheme. On the idea of the quantity utilized in buying the brand new property and the quantity deposited within the deposit account, the assessing supply will give an exemption beneath Sec.54F.

By withdrawing the quantity from the deposit account, a brand new home might be bought or constructed inside the specified time restrict.

If the quantity deposited isn’t utilized totally for buy or development of latest home inside the stipulated interval, then the next quantity might be handled as LTCG of the earlier yr wherein the interval of three years from the date of switch of authentic asset expires.

Unutilized quantity within the deposit account (Claimed beneath Sec.54F)* (Quantity of authentic capital acquire/Web sale consideration).

In such case, the taxpayer can withdraw the unutilized quantity at any time after the expire of three years from the date of switch of the unique asset in accordance with the aforesaid scheme.

Is it sensible to make use of Sec.54F to pay ZERO tax on the income of Mutual Funds and Shares?

The essential query is whether or not it’s prudent to make the most of Part 54F to keep away from taxes on positive factors from mutual funds and shares. My reply is NO. Nonetheless, in case your investments in mutual funds and shares are geared toward buying actual property, it’s possible you’ll leverage this part to assert the related advantages. However, in case your intentions are directed in the direction of different targets, redeeming present fairness mutual funds (debt funds aren’t relevant) or shares solely for the aim of investing in actual property to realize tax financial savings is ill-advised.

The duty to pay taxes is an unavoidable side of our funding journey. Moreover, we’ve got no affect over future tax laws. Nonetheless, focusing excessively on tax implications and investing in illiquid and low-yielding property—significantly these which can be at present topic to excessive taxation as a result of elimination of indexation advantages—clearly constitutes a misguided resolution.

It’s essential to be cautious when contemplating social media posts about tax financial savings associated to the sale of fairness mutual funds or shares. Quite than blindly following such recommendation, take the time to know your motivations for redeeming these investments. Moreover, consider whether or not reinvesting in actual property meets your particular person necessities. This self-reflection is crucial and shouldn’t be swayed by generic social media strategies or the prevailing crowd mentality.