Income From Shares, Mutual Funds - Dividend, Capital Gains

During last 10 years, Indian share market has done well. There are certain regulations for foreign investor’s investments into share of companies. Generally, these investments are done by NRIs/PIOs through share market (NSE, BSE). NRIs/PIOs have been provided a special window under Portfolio Investment Scheme (‘PIS’) of FEMA Regulations. Sometime, Investment in shares of companies are also done directly i.e. by direct allotment from the company under Foreign Direct Investment (FDI) Scheme. NRIs/PIOs are also allowed to invest into Mutual Funds. These investments, earn a good return on their investment to NRIs/PIOs, and being very popular since last 8-10 years. Return come in two form i.e. Dividend and Capital Gains on Sale. Tax provisions deal with both kind of income differently. Salient features wrt income from Shares and Mutual Funds are as under:

Salient Features wrt Shares and Mutual Fund Income:

  • Dividend Income From Shares, Mutual Funds: Dividend Income, from shares of Indian Company, is exempt from income tax under the provisions of section 10(34). Dividend income from the units of specified mutual funds is exempt from income tax under the provisions of section 10(35).
  • Long Term Capital Gains: Gains arising on sale of a long term capital asset being equity share of unit of mutual fund is exempted from income tax under the provisions of section 10 (38) of Income Tax Act. For being a long term capital asset, equity shares of Indian company or units of mutual funds should be held by the investor for a period of 12 months or more. Hence, capital gains on sale of shares or mutual funds, which is held for 12 months or more, are exempt from tax.
  • Short Term Capital Gains: If shares or mutual funds are sold within 12 months from the date of purchase then the gains arising on the same is termed as Short Term Capital Gains (STCG). Generally, STCG is taxed at maximum rate i.e. @ 30%. However, STCG on shares or mutual funds have been given special rate of taxation i.e. @ 15%.
  • TDS on Share or Mutual Fund Income: There is no TDS on dividend income distributed (to its shareholders/unit holders) by the Indian Company/Mutual Fund. Also, there is no TDS on payment made in relation to sale of long term shares/mutual fund. However, payment made in relation to sale of Short Term Capital Asset attracts TDS.
  • Tax Computation: During preparation of ITR, Dividend income forms part of ‘Income From Other Sources’ Head and Capital Gain income forms part of ‘Capital Gains’ Head. Dividend as well Capital Gains income, from all companies/mutual funds, gets clubbed under these Heads of Income and then gets merged with other Head’s Income into Gross Total Income.
  • Double Tax Avoidance Agreement: Being tax resident of the other country, NRIs may seek course of applying benefits of Double Tax Avoidance Agreement between India and the Other Country. Generally, there is no requirement of checking the benefit under DTAA as the Dividend and Capital Gain Income from Shares and Mutual Funds avail special benefits under Income Tax Act itself.


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