Listen to this article
One of our readers wrote to us with this query.
ETFs have some unique options and I would like to recommend ETFs but since these instruments are not so liquid, I am more comfortable with Fund of Fund (FoF) structure. However, I am concerned about the debt taxation applicable on FoF.
Name withheld on request
Dear Reader,
Thanks for writing to us.
There is a misconception that all FoFs have debt taxation. In reality, there are FoFs investing in equity instruments having an equity taxation structure.
According to the section 112A of the Income Tax Act, if FoFs invest at least 90% of their corpus in units of any listed equity ETFs, they will be considered as equity-oriented funds for taxation purpose.
For instance, if you wish to invest in large cap FoF investing over 90% of its units in Nifty 50 ETFs and Nifty 100 ETFs, it will be considered as an equity fund for taxation.
However, if FoF invest in units of actively managed equity funds, it will be considered as debt funds even as the underlying fund is equity.
Since the units of actively managed schemes are not listed on stock exchanges, FoFs investing in them do not qualify for equity taxation.
For international FoFs, the taxation will be of debt funds as the underlying indices are not listed on Indian stock exchanges.
Currently, equity funds are taxed at 15% on short term capital gains and 10% on income exceeding Rs.1 lakh on long term capital gains. Long term capital gains tax is applicable after 12 months in equity funds.
On the other hand, capital gains on debt funds are taxed at marginal rate i.e. gains are added to the annual income and taxed based on the tax slab of clients irrespective of holding period.
Hope we have addressed your query!
Regards,
Team Cafemutual