FAQs – New Capital gains Taxation regime

Subsequent to the changes proposed by Finance (No.2) Bill, 2024 in the Capital Gains taxation scheme, the government released FAQs on the e-filing website specifying the major changes, applicability, changes in the period of holding of various assets, and clarity on the roll over benefits on capital gains. The new provisions for taxation of capital gains come into force from 23.7.2024 and shall apply to any transfer made on or after 23.07.2024.
The key takeaways are as follows:

• There are only two holding periods now, i.e., 1 year and 2 years from the existing three holding periods.
• Indexation has been done away with for ease of computation with simultaneous reduction of rate from 20% to 12.5%.
• Rate for short-term STT paid listed equity shares, equity oriented mutual fund and units of business trust (Section 111A) has increased from 15% to 20%. Similarly, the rate for these assets for long-term capital gains (Section 112A) has increased from 10% to 12.5%.
• The exemption limit of 1 lakh for Long term capital gains on these assets is also increased to Rs. 1.25 lakh which will apply for FY 2024-25 and subsequent years.
• Parity between Resident and Non-resident.
• No change in roll over benefits ie., taxpayers can invest their gains in a house under section 54 or section 54F or in certain bonds under section 54EC.

Click Here To Read The Full Update

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Case Details: Shell Gas BV v. Assistant Commissioner of Income-tax, International Taxation - [2024] 164 taxmann.com 555 (Gujarat)

Judiciary and Counsel Details

• Bhargav D. Karia & Niral R. Mehta, JJ.
• Ms. S.N. Soparkar, Sr. Adv. & B.S. Soparkar for the Petitioner.
• Varun K. Patel for the Respondent.

Facts of the Case

During the year under consideration, the assessee advanced an interest-free ECB loan to its Indian subsidiary. It did not file a return of income, assuming no taxable income in India.

The Assessing Officer (AO) issued a notice under section 148(b) alleging escapement of income on the issue of non-charging interest to the Indian subsidiary. The assessee filed a detailed response to the notice. Subsequently, the AO passed an order under section 148A(d), and consequential notice under section 148 of the even date was also issued, requiring the assessee to file the return of income.

Aggrieved by the order, the assessee filed a writ petition before the Gujarat High Court.

High Court Held

The High Court held that the impugned order passed by the AO had recorded the contents of the notice issued under section 148A(b) and thereafter reproduced the entire submissions made by the assessee and again reiterated the contents of the notice under section 148A(b) to come to prima facie conclusion that it was a fit case to reopen the assessment.

Reasons are required to be given by any quasi-judicial authority dealing with the contentions raised more particularly in the Scheme of the Act when it stipulates statutory opportunity to the assessee to file a reply to the notice issued under section 148A(b) and thereafter on consideration of the reply and materials on record, the AO is required to come to the prima facie conclusion that it is a fit case to reopen the assessment.

It appeared from the impugned order that the AO had materially complied with the formalities of consideration “of reply” by reproducing the reply without dealing with the issues raised in the said reply. Merely reproduction of the reply filed by the assessee cannot be said to be in compliance with provisions of section 148A(d).

On comparison of the contents of the notice and the conclusion arrived at after reproduction of the reply of the assessee, it was apparent that the AO did not apply his mind while passing the impugned order under section 148A(d). As AO did not state as to why the submissions filed by the assessee were not acceptable and without dealing with it which was a pre-requisite passed the impugned order under section 148A(d).

Thus, failure on the part of the AO to give reasons dealing with the contentions of the assessee resulted in the entire purpose of introduction of the Scheme for reopening under section 148A as a futile exercise.

Therefore, the impugned order under section 148A(d) was not tenable as it was bereft of any reason and consequently, notice under section 148 was also liable to be quashed and set aside.

The post HC Quashes Sec. 148A(d) Order as AO Didn’t State Why Submissions Filed by Assessee Were Not Acceptable appeared first on Taxmann Blog.

Case Details: Mr. & Mrs. S.M. Batha Education Trust vs. CIT(E) - [2024] 164 taxmann.com 266 (Pune-Trib.)

Judiciary and Counsel Details

• Inturi Rama Rao, Accountant Member & Partha Sarathi Chaudhury, Judicial Member
• Percy Pardiwala, Vishnu Bhutada & Smt. Arati Sathe for the Appellant.
• Ajay Kumar Kesari for the Respondent.

Facts of the Case

The assessee-trust was granted registration under section 12AA. Subsequently, the CIT(E) found that the trust deed provided that the settlor shall be entitled to reside and use a portion of the property for herself, her family, and guests during her lifetime.

Noticing such violations, a show cause notice was issued to assessee. In response, the assessee contended that the settlor’s benefit did not arise as the settlor had passed away in 1965, and there was no violation of provisions of section 13(3) of the Act. Rejecting all the contentions of the assessee, the CIT(E) passed an order to cancel the registration.

Aggrieved by the order, an appeal was filed to the Pune Tribunal.

ITAT Held

The Tribunal held that the solitary issue that arises for consideration is whether or not the CIT(E) was justified in cancelling the registration granted under section 12AA. The provisions of section 12AA(3) empower the CIT(E) to cancel the registration granted under section 12AA only on the existence of one of the two conditions in the said section, i.e.,

1. the activities of the trust are not genuine, and
2. the activities of the trust are not being carried out in accordance with the objects of the trust.

A mere reading of the impugned order revealed that the entire proceedings of the CIT(E) were based on the covenants of the trust deed rather than on the actual activities carried out by the trust. The mere fact that the trust deed contained a covenant that enabled the settlor to utilise the premises for her use or family use cannot empower the CIT(E) to cancel the registration, as it did not lead to any conclusion that either the activities of the trust were not genuine or the activities were not being carried out in accordance with the objects of the trust.

Accordingly, the order was set aside.

List of Cases Reviewed

• CIT v. Institute Management Committee of Industrial Training Institute [2017] 393 ITR 161 (Bom.) (para 9) followed.

List of Cases Referred to

• CIT v. Institute Management Committee of Industrial Training Institute [2017] 393 ITR 161 (Bom.) (para 8).

The post CIT(E) Can’t Cancel Registration of Trust Just Because Trust Deed Allowed Settlor to Use Premises for Her Lifetime | ITAT appeared first on Taxmann Blog.

Mayank Mohanka – [2024] 164 taxmann.com 538 (Article)

The much-awaited Union Budget 2024-25 has been presented by our hon’ble Finance Minister Smt. Nirmala Sitharaman today on 23rd July 2024, before the Parliament. The budget speech of FM highlighted some very welcome budget amendments in the direct tax domain. However, the Fine Print of the Finance (No.2) Bill, 2024, revealed some additional very significant and critical budget amendments in the direct tax domain, which are being analysed and explained below, for ready reference of Readers.

1. Amendments pertaining to Capital Gains

• Section 2(42A) of the Act is proposed to be amended to provide that for all listed securities, the holding period to qualify as long-term capital gain, will be 12 months and for all other assets, it shall be 24 months.
• The rate for short-term capital gain under provisions of section 111A of the Act on STT paid equity shares, units of equity oriented mutual fund and unit of a business trust is proposed to be increased to 20% from the present rate of 15%.
• The rate of long-term capital gains under provisions of various sections of the Act is proposed to be pegged at 12.5% without indexation benefit, in respect of all category of assets. This rate earlier was 10% for STT paid listed equity shares, units of equity-oriented fund and business trust under section 112A and for other assets it was 20% with indexation under section 112.
• An exemption of gains upto 1.25 lakh (aggregate) is proposed for long-term capital gains under section 112A on STT paid equity shares, units of equity oriented fund and business trust, thus, increasing the previously available exemption which was upto 1 lakh of income from long term capital gains on such assets.
• Unlisted debentures and unlisted bonds are proposed to be taxed at applicable rate slab rate of the investor, whether short-term or long-term, by including them under provisions of section 50AA of the Act.
• The indexation benefit available under second proviso to section 48 is proposed to be removed for calculation of any long-term capital gains which is presently available for property, gold and other unlisted assets.
• It is proposed to substitute clause (iii) of section 47 and its proviso, to provide that nothing contained in section 45 shall apply to transfer of a capital asset, under a gift or will or an irrevocable trust, by an individual or a Hindu undivided family. Thus, gifts made by companies will be considered as ‘transfer’ only u/s 45, for the purpose of capital gains tax.
  These amendments shall come into effect from the 23rd day of July, 2024.

Click Here To Read The Full Article

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Tax Deducted at Source (TDS) Rates refer to the specific percentages at which tax is deducted from various types of payments at the source of income. These rates are set by the government and vary depending on the nature of the payment and the status of the recipient (like individual, company, etc.). Common payments subject to TDS include salaries, interest payments, dividends, professional fees, and rent.

The table below shows the proposed changes to Tax Deducted at Source (TDS) rates by the Finance (No. 2) Bill 2024 compared to the existing rates.

The post TDS Rates – A Comparative Analysis of Existing vs. Proposed Changes appeared first on Taxmann Blog.

The new and old tax regimes in India offer different approaches to taxation with varying tax rates and deductions available to individuals. Our detailed table outlines the financial implications of the recent proposals in the Finance (No. 2) Bill 2024. Discover the optimal scenarios for electing the new Section 115BAC, and understand the impact of deductions such as Section 80C, 80D, and housing loan interest on your tax liabilities.

Table of Contents

1. Table 1: Individual not eligible for any deduction
2. Table 2: Individual eligible for deduction under section 80C
3. Table 3: Assessee is eligible for deduction under sections 80C and 80D
4. Table 4: Assessee is eligible for deduction under section 80C and 80D, and deduction for interest on housing loan under section 24(b)

The table below outlines the breakeven points for the new and old tax regime after the amendment proposed by the Finance (No. 2) Bill 2024.

1. Table 1: Individual not eligible for any deduction

2. Table 2: Individual eligible for deduction under section 80C

3. Table 3: Assessee is eligible for deduction under sections 80C and 80D

4. Table 4: Assessee is eligible for deduction under section 80C and 80D, and deduction for interest on housing loan under section 24(b)

The post Decoding the Break-Even Points | Choosing Between Old vs. New Tax Regime appeared first on Taxmann Blog.

The Finance Minister, Smt. Nirmala Sitharaman presented the Union Budget 2024-25 in Parliament. The Finance Minister has also tabled the Finance (no. 2) Bill 2024, which has proposed various amendments to the tax and corporate laws.

Visit https://www.taxmann.com/budget to get the legal analysis of all amendments proposed in the Finance (No. 2) Bill, 2024.

Download the copy of:

Finance (No. 2) Bill, 2024

Memorandum Explaining Finance (No. 2) Bill, 2024

Budget Highlights

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As the Union Budget 2024 draws near, the charitable trusts are particularly focused on the anticipated policy changes that could impact their operations. The charitable trusts has been navigating a complex landscape, which have become increasingly convoluted due to numerous amendments over recent years. With the budget presentation scheduled for July 23, 2024, in the Lok Sabha, several critical recommendations are poised for consideration, aiming to simplify these regulations for charitable trusts. Proposals include:
– Creating a unified tax regime to streamline the existing frameworks.
– Introducing a presumptive-like tax scheme to reduce the administrative burden on smaller trusts.
– Defining the 'commencement of activities' to clear ambiguities that often complicate compliance.

Table of Contents

Introduction

1. Unified and Simple Tax Regime
2. Presumptive-like Scheme for Taxation of Charitable Trusts
3. Provide a Definition of ‘Commencement of Activities’
4. Consequential Amendment to Section 13(9)
5. Clarity on Applicability of Tax Audit under Section 44AB

Introduction

As the Union Budget 2024 approaches, anticipation is building across various sectors for significant policy shifts. The charity sector, in particular, is abuzz with hope and apprehension. Over the past few years, a barrage of amendments has not only complicated life for charitable trusts but also posed challenges for tax consultants. Instead of simplifying the taxation process, these changes have often created a labyrinth of rules and regulations.

With the Budget set to be presented in the Lok Sabha on July 23, 2024, there are a few key suggestions for the finance minister to consider in Union Budget 2024 to truly simplify the taxation of charitable trusts. These changes, if implemented, could bring about much-needed simplicity and efficiency, providing a ray of hope, especially for the survival of small charitable entities.

1. Unified and Simple Tax Regime

Presently, charitable trusts and institutions can claim an exemption under any of the following two regimes:

• Institutions approved by the Principal Commissioner or Commissioner of Income-tax (“PCIT/CIT”) under Section 10(23C); and
• Trusts registered under Section 12AA/ 12AB.

In the last couple of years, many amendments have been introduced to the provisions relating to the taxation of charitable and religious trusts. Many differences between both regimes have been diluted with these amendments, and many issues have been addressed. However, the following inconsistencies still remain;

• Explanation 1(2) to Section 11(1) provides an option to treat the subsequent year’s application as the current year’s application. However, Section 10(23C) does not offer a similar option.
• Capital gains arising to a charitable institution are not chargeable to tax if the institution invests the net consideration in acquiring a new capital asset [section 11(1)A]. This concession is not available under section 10(23C).
• Under Section 10(23C), there are two categories of institutions, approval-based and non-approval, whereas, in Section 12A, the exemption is allowed only to the registered institutions.

To simplify the tax provisions, it is recommended that the above gaps should be removed and the approval-based category of exemption under Section 10(23C) be merged with the tax regime under Sections 11 to 13.

2. Presumptive-like Scheme for Taxation of Charitable Trusts

Under the normal taxation scheme, taxpayers have two options for paying tax on business income. The first option is to compute taxable income based on detailed books of account. The second option is the Presumptive Tax Scheme, where income is estimated at a prescribed percentage or amount based on total turnover or gross receipts, without the requirement to maintain books of accounts or undergo audits. Various presumptive taxation schemes are available for both resident and non-resident assessees.

In the realm of charitable trusts, Section 10(23C) already offers similar schemes for specific institutions. For instance, educational institutions with annual receipts not exceeding Rs. 5 crores [Section 10(23C)(iiiad)] and hospitals or other specified institutions with annual receipts not exceeding Rs. 5 crores [Section 10(23C)(iiiae)] benefit from simplified taxation.

The finance minister should consider introducing a similar scheme for small trusts registered under Sections 11 to 13 with receipts up to Rs. 5 crores. This scheme would allow these trusts to claim exemptions without the burden of maintaining extensive books of accounts and fulfilling other stringent conditions, thereby enabling them to focus on fulfilling their charitable purposes.

3. Provide a Definition of ‘Commencement of Activities’

Section 12A(1)(ac)(vi)(A) contains the provision for filing the registration application by the trusts or institutions that have not commenced their activities. Thus, only those trusts and institutions shall file an application for provisional registration that has not commenced its activities. The trust or institution need not apply for provisional registration if it has commenced activities.

Provisional registration shall be granted for 3 years from the assessment year from which the registration is sought. However, the 3 years period is available only if the activities have not been commenced. Therefore, for all practical purposes, the organisation has to convert its provisional registration into regular registration unless it remains inactive without commencing activities. If a trust fails to apply for this conversion, the provisions of accreted tax under Section 115TD will apply.

The requirement to apply for provisional registration applies to those trusts or institutions that have not commenced their activities. The terms “activity” and “commencement” have not been defined in the Income-tax Act. Although several judicial pronouncements explained the commencement of the activity for commercial institutions, the point of commencement for charitable and religious institutions remains uncertain.

Different legal interpretations may arise due to the broad meaning of the word “activity”, which could include preparatory activities leading up to the actual commencement of the activity. Therefore, the Central Board of Direct Taxes (CBDT) should provide clear guidelines on what constitutes the commencement of activities for charitable and religious institutions to remove any ambiguity and ensure consistent application of the law.

4. Consequential Amendment to Section 13(9)

As per Section 11(2), if a trust cannot apply 85 per cent of its income in a particular year, it can accumulate the shortfall to be used for religious or charitable purposes within the next 5 years. This accumulation is allowed if the assessing officer is informed about the purpose of the accumulation and the period for which the income is being accumulated. This information is to be furnished in Form 10.

The Finance Act, 2023 has preponed the due dates by two months with effect from the assessment year 2023-24. Now, the information in Form 10 must be furnished at least two months before the due date specified under Section 139(1) for furnishing the return of income for the previous year.

Section 13 specifies the circumstances under which the exemptions under Section 11 and Section 12 would not be available to trusts. Section 13(9) provides that to claim the benefit of accumulation for five years, Form 10 and ITR need to be submitted before the due date.

Since section 11(2) has been amended to prepone the date to file Form 10 by two months, no consequential amendment has been made in Section 13(9). So, in a way, it implies that there will be no penal consequences if Form 10 is filed up to the due date to file an Income-tax return, i.e., there will be no withdrawal of exemption in respect of the accumulated amount.

The Central Board of Direct Taxes (CBDT) has also issued Circular No. 6/2023, dated 24-05-2023, clarifying that a trust will not be denied the benefit of accumulation even if Form 10 is not filed two months before the due date under Section 139(1). However, Form 10 must still be submitted on or before the due date for filing the ITR to avail of this benefit. Thus, the effect of the Finance Act 2023 amendment is effectively nullified by this circular.

To align with the department’s intent to have Form 10 filed two months before the ITR due date, it is recommended that:

• Circular be withdrawn
• A consequential amendment be made to Section 13(9) to reflect the revised filing schedule for Form 10

The underlying rationale for this amendment is that the due dates for filing Form 10 should precede the due date for filing the ITR and audit report. The current misalignment complicates auditors’ ability to report the details of Form 10 in the audit report, given that the due date to file the audit report in Form 10B/10BB is one month before the due date to file the ITR. Synchronising these dates would simplify compliance and reporting requirements.

5. Clarity on Applicability of Tax Audit under Section 44AB

Section 44AB of the Income-tax Act mandates the audit of books of account for an assessee engaged in business or profession. The audit report under Section 44AB must be furnished in Form No. 3CA/3CB-3CD. A pertinent question arises whether the ‘Tax Audit’ under Section 44AB applies to charitable and religious institutions registered under Section 12AB. These institutions are governed by Sections 11 to 13, which contain special provisions for the taxation of charitable or religious institutions. This issue remains controversial and debatable due to contradictory requirements in the Income-tax Rules.

Rule 17A of the Income-tax Rules, 1962, outlines the documents required for the registration application in Form 10A or 10AB. It necessitates the submission of an audit report under Section 44AB if the applicant holds a business undertaking as per the provisions of Section 11(4) and where the income includes profits and gains from business as per Section 11(4A).

The Form 10B audit report also requires uploading the Balance Sheet, Profit and Loss Account, and Audit Report in Form 3CA or 3CB (as applicable) for the business undertaking or business incidental to the charitable objectives.

However, it is well-settled law that the income of charitable institutions is to be computed in a commercial sense and not under the five heads of income, including profits and gains from business. The requirement for an audit under Section 44AB pertains to income computed under the head ‘Profit & Gain from Business.’ Therefore, this audit is required only when the income is computed under the head ‘Profit & Gain from Business’ or there is a specific requirement for a tax audit under Section 44AB.

To compute income under Section 11(4) or Section 11(4A), there is no requirement to compute income under the head ‘Profits & Gains of Business or Profession.’ Notably, Sections 11 to 13 include specific references where provisions applicable under the head ‘Profits & Gains of Business or Profession’ are also made applicable to the computation of income under Section 11, such as disallowances on non-deduction of TDS and cash payments.

‘Tax Audit’ is a specific requirement for assessees with income under the head ‘Business and Profession.’ Therefore, there is no obligation for charitable institutions to have their accounts audited under Section 44AB. However, these organizations are subject to the specific audit requirement under Section 12A(1)(b) read with Rule 17B, with the audit report to be furnished in Form 10B/10BB.

Hence, the CBDT should clarify the applicability of tax audit under Section 44AB to charitable institutions registered under Section 12AB to eliminate any ambiguity with the requirement being imposed in certain rules.

Dive Deeper:
Union Budget 2024-25 | Taxmann’s Key Expectations & Recommendations

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Investing in the stock market can be challenging, especially if you're unsure how to identify profitable stocks. Professional investment vehicles like Mutual Funds (MF), Portfolio Management Services (PMS), and Alternative Investment Funds (AIF) can help mitigate these risks and provide structured investment strategies. It's important to note the minimum investment requirements: Mutual Funds can start with as little as Rs. 100, while PMS and AIF require minimum investments of Rs. 50 lakhs and Rs. 1 crore, respectively.
These investment vehicles cater to different types of investors, such as:
– Mutual Funds are ideal for retail investors looking for a diversified, professionally managed portfolio.
– PMS offers personalized portfolio management for high-net-worth individuals, allowing for customized investment strategies.
– AIFs are suitable for sophisticated investors seeking access to non-traditional investment opportunities such as private equity and hedge funds.
By understanding the unique features and benefits of each option, investors can make well-informed decisions that best align with their financial goals and risk tolerance.

Table of Contents

Introduction

1. About the Investment Vehicles
2. Taxation
3. Returns
4. Conclusion

Introduction

If you do not know how to discover a multi-bagger stock or are afraid of picking the wrong stocks, the Mutual Fund, PMS[1] or AIF[2] can help you invest in the stock market. The risk of losing money by investing in these vehicles is less than that of a retail investor who invests directly with little guidance and research.

PS: Before you read further, here is one disclaimer: You can begin the investment journey with mutual funds by investing just Rs. 100, but you need Rs. 50 lakhs for PMS and Rs. 1 crore with AIF.

All these investment vehicles are managed by professionals, and you have the flexibility to choose according to your risk appetite. Mutual Funds pool resources from retail investors but offer less flexibility within the same scheme. PMS provides high-net-worth individuals with personalised portfolio management and customised investment strategies. AIFs cater to sophisticated investors seeking investments beyond traditional markets, such as infrastructure funds, private equity, and hedge funds.

By understanding the differences and benefits of each option, investors can make well-informed decisions that align with their financial goals and risk tolerance.

1. About the Investment Vehicles

1.1 PMS

In PMS, experienced portfolio managers make investment decisions on your behalf. They aim to maximise the returns and minimise risks. With PMS, you can minimise the risk of making uninformed decisions and maximise the return by investing in various assets, including equities, bonds, mutual funds, ETFs, and alternative investments like commodities. The allocation depends on the client’s objectives and the portfolio manager’s strategy.
SEBI specified the minimum investment of Rs. 50 lakhs for an individual to take the Portfolio Management Services. There is no lock-in period to withdraw the investment from the PMS, but an exit load may apply.
An investor can choose an active or a passive portfolio management service. In the former, the portfolio manager actively seeks to maximise the returns but may take higher risks. In the latter, the fund manager aligns portfolios with current market trends by investing in index funds.

1.2 AIF

An AIF is established in India as a privately pooled investment vehicle to collect funds from investors, Indian or foreign, for investing as per the defined investment policy. AIF can be set up as a trust, company, LLP or any other body corporate, and it is mandatory to obtain registration from SEBI.

Each scheme of an AIF may have at most 1,000 investors, except for angel funds, which have a limit of 200 investors. It requires a minimum investment of Rs. 1 crore from investors, except from employees or directors of the Fund, who must invest a minimum of Rs. 25 lakhs. In the case of a social impact fund that invests in securities of not-for-profit organisations registered or listed on a social stock exchange, the minimum value of investment by an individual investor must be Rs. 2 lakhs.

An AIF offers three categories of investment.

Category-I AIFs invest in start-up or early-stage ventures, social ventures, infrastructure or other sectors that are considered socially or economically desirable. It includes Venture Capital Funds, SME Funds, Social Venture Funds, Infrastructure Funds, etc. These are close-ended funds with a minimum lock-in period of 3 years.

Category-II AIFs invest in areas where Cat-I and Cat-III do not invest. This includes private equity funds or debt funds for which no specific incentives or concessions are given by the Government or any other regulator. These funds are also closed-ended with a minimum lock-in period of 3 years.

Category-III AIFs are the most aggressive category of AIFs. They are allowed to use advanced or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives. They include hedge funds or funds that trade to make short-term returns. Category III AIFs are usually closed-ended within a lock-in period of 1-3 years. For taxation purposes, Category-III AIFs are further classified into Specified Category-III AIFs, which meet the conditions prescribed under Section 10(4D) of the Income Tax Act, and Other Category-III AIFs.

1.3 Mutual Fund

A mutual fund needs no introduction. It pools money from investors to purchase a diversified portfolio of securities such as stocks, bonds, money market instruments, and other assets. SEBI has specified the mutual fund schemes an AMC[3] can launch: equity, debt, hybrid, solution-oriented, index funds, and Fund-of-Funds. The equity schemes are classified into multi-cap, large-cap, mid-cap, focused fund, flexi-cap, etc. Fund managers cannot explore the unregulated market and only invest in regulated securities. They have the flexibility to invest in securities that fulfil the criteria of the scheme. They cannot invest in securities not belonging to the scheme, even if they are available at dirt-cheap prices.
Many mutual funds have a minimum initial investment requirement of around Rs. 100, while some may have higher minimums. This allows investors with varying budgets to participate in mutual fund investments. The lock-in period in mutual funds varies for different schemes. Solution-oriented schemes have a lock-in period of 5 years, while ELSS (Equity Linked Savings Scheme) requires a 3-year lock-in period. For all other schemes, there is no lock-in period; however, an exit load may apply.

1.4 Comparative Analysis

2. Taxation

2.1 AIF

Taxation of Category-I and Category-II AIF is governed by Section 115UB of the Income-tax Act, which provides pass-through status to the funds. The income (other than the income chargeable under the head business or profession) arising to such funds is exempted from tax in their hands under Section 10(23FBA). The unitholders are liable to pay tax on such income as if they earned the income directly. Thus, the income paid or credited or deemed to be credited by such funds to their unitholders shall be deemed to be of the same nature and in the same proportion in the hands of the unitholder. The AIFs shall deduct tax from the payment of other income to the unit-holders under Section 194LBB.

There is no pass-through status for Category-III AIF. Thus, the income of Category-III AIF is taxable. However, certain income of Specified Category-III AIF is exempt from tax under Section 10(4D) and Section 10(23FF). These AIFs are located in IFSC, and all their units must be held by non-residents except those held by the sponsor or manager. The non-resident unitholders of the specified Cat-III AIFs are exempt from tax for the income received from the AIF and the Income arising from the transfer of units.

The income of other Category-III AIF shall be taxable in its hands. Further, any income earned by unit holders from Category-III AIF shall also be taxable as per the applicable tax rate.

2.2 PMS

PMS is a way to invest in securities, just like mutual funds. However, unlike mutual funds, there is no explicit provision to tax the income earned through PMS. Thus, such income shall be taxable per the general provisions. The tax rates in some cases have been mentioned in the table below.

2.3 Mutual Funds

The income of a mutual fund is fully exempt from tax. It means the capital gains, dividends, and interest income earned by the mutual fund shall be exempt from tax. However, when the mutual fund distributes such income to the investors or when the investors redeem the units of the mutual fund, the income arising therefrom shall be taxable in the hands of the investors. It should be noted that the income of the sponsor (AMC) shall be taxable.

Investors in mutual funds can choose between two options for receiving returns: Growth or IDCW (Income Distribution Cum Capital Withdrawal).

The growth option focuses on capital appreciation, where the fund’s profits are reinvested back into the fund. This compounding effect can lead to higher overall returns in the long term.

The IDCW option provides investors with regular income streams in the form of dividends, which are paid out of the fund’s profits. IDCW payouts can reduce the potential for capital appreciation over time, as less money is being reinvested within the fund. The dividend income the unitholders receive shall be taxable at the applicable rate.

The capital gains arising from the transfer of units of the mutual funds shall be taxable at the rate specified in the below table.

3. Returns

In the tables below, we compare the annualised returns[8] generated from mutual funds and PMS in various risk categories (large-cap[9], mid-cap[10], small-cap[11] and multi-cap[12]) against the benchmark returns of that category. Based on the annualised returns, we have identified the winners. Where the winner is a mutual fund or PMS, we specified the alpha generated over the index returns.

Sidebar: ‘Alpha’ is a metric used in the stock market to measure an investment’s performance relative to a benchmark index. A scheme’s higher alpha shows the excessive return it generated over the index return. An ‘index’ or ‘benchmark’ return refers to the performance of a basket of stocks in that index over a specific period. NSE has more than 70 indices, which are classified into broad market indices, sectoral indices, thematic indices, fixed-income indices, etc.

3.1 Median returns of Mutual Funds and PMS against the category benchmark

In the table below, we have identified the median return of the top 10 funds in the given risk category and compared it against the index returns. We have identified the winners based on the annualised returns in the given time frame. Where the winner is a mutual fund or PMS, we specified the alpha generated over the index returns. Where the benchmark has given higher returns over the funds, the alpha has not been computed.

In the higher time frame, the benchmark returns have outshined the returns generated by the funds in all risk categories except in multi-cap.

3.2 Top performing Mutual Funds and PMS based on CAGR return of 5 years.

In the table below, we have identified the top-performing funds in the given risk category based on the annualised return (CAGR) in 5 years.

3.3 Median Return from AIF

In the table below, we have computed the median return of the top 10 AIF Category-III funds in the given risk category based on the annualised returns in the given time frame. There are two risk categories in AIF Category-III – Long Fund[13] and Long-Short Fund[14].

3.4 Top performing AIF based on CAGR return of 5 years

In the table below, we have identified the top-performing funds in the given risk category based on their annualised return (CAGR) in 5 years[15].

4. Conclusion

When deciding between Mutual Funds, Portfolio Management Services (PMS), and Alternative Investment Funds (AIF), investors should consider several critical factors: risk appetite, flexibility, transparency, taxation, expense ratios, duration, and the investible amount.

4.1 Investible Amount and Accessibility

Due to their higher entry thresholds, PMS and AIF may be impractical for investors with limited investible amounts. In such cases, Mutual Funds present a more accessible option.

4.2 Expense Ratios

PMS and AIF charge significant fees, often around 2.5% of the total portfolio value. In contrast, sectoral or thematic Mutual Funds typically have expense ratios below 1%, with index-based Mutual Funds even lower at around 0.5%. Therefore, evaluating the expense ratio is crucial when selecting an investment vehicle.

4.3 Lock-in Periods and Liquidity

PMS and AIF usually impose lock-in periods ranging from 1 to 3 years, with potential exit charges if funds are liquidated early. Mutual Funds, however, do not levy exit charges after one year, and index funds only have a 7-day lock-in period. Mutual funds are preferable for investors seeking flexibility and shorter commitments.

4.4 Transparency

PMS and AIF offer greater transparency, providing detailed and regular updates on the shares bought and sold. Mutual Funds, on the other hand, disclose portfolio details periodically, typically quarterly. Investors valuing frequent updates might find PMS and AIF more attractive.

4.5 Taxation

The taxation impact on PMS and Mutual Funds is generally similar, but AIFs may incur additional taxes. Thus, tax implications should be carefully considered when choosing between these investment options.

4.6 Risk Considerations

Investors with a lower risk tolerance should consider index-based Mutual Funds due to their lower expense ratios and minimal lock-in periods. Such investors are advised to avoid PMS and AIF, which often involve higher risks and costs.

By weighing these factors, investors can make informed decisions that align with their financial goals and risk preferences.

[1] Portfolio Management Services

[2] Alternative Investment Funds

[3] Asset Management Companies

[4] The tax shall be charged on the long-term capital exceeding Rs. 1 lakh.

[5] The tax shall be charged on the long-term capital exceeding Rs. 1 lakh.

[6] The tax shall be charged on the long-term capital exceeding Rs. 1 lakh.

[7] The tax shall be charged on the long-term capital exceeding Rs. 1 lakh.

[8] Based on data filed with the SEBI until 30^th June 2024 and downloaded from www.moneycontrol.com and www.pmsaifworld.com

[9] Large-cap means a fund that invests at least 80% in shares of large-cap companies.

[10] Mid-cap means a fund that invests at least 65% in shares of mid-cap companies.

[11] Small-cap means a fund that invests at least 65% in shares of small-cap companies.

[12] Multi-cap is a fund that invests at least 25% in large-cap companies, 25% in mid-cap companies, and 25% in small-cap companies.

[13] A long-only fund is an investment strategy where the manager buys and holds securities, expecting their value to rise, without engaging in short selling.

[14]A long-short fund is an investment strategy in which the manager takes both long positions (buying securities expecting their value to rise) and short positions (selling securities expecting their value to decline and repurchasing them at a lower price).

[15] Based on data filed with the SEBI until 31^st May 2024 and downloaded from www.pmsaifworld.com

The post [Analysis] Investment Vehicles Comparison – Mutual Funds | PMS | AIF Explained appeared first on Taxmann Blog.

Case Details: Late Shri Balkrishan Joshi (Through L/H Shri Bhoopendra Joshi) vs. Income-tax Officer - [2024] 164 taxmann.com 377 (Indore-Trib.)

Judiciary and Counsel Details

• Vijay Pal Rao, Judicial Member & B.M. Biyani, Accountant Member
• S.N. Agrawal & Bavesh Agrawal, ARs. for the Appellant.
• Ashish Porwal, Sr. DR for the Respondent.

Facts of the Case

The assessee had filed a return of income and declared long-term capital gain arising from the sale of a residential house. The assessee opted for deduction of the cost of acquisition based on Fair Market Value (FMV) as of 1-4-1981 and, accordingly, worked FMV.

However, the Assessing Officer (AO) referred the matter to the DVO to determine the correct amount of FMV as of 1-4-1981. The AO allowed the deduction of the cost of acquisition adopting the FMV as determined by the DVO.

Contending that the AO ought to have computed FMV based on the ‘reverse indexation method’, the assessee filed an appeal to CIT(A). CIT(A) upheld the order of the AO, and the matter reached before the Indore Tribunal.

ITAT Held

The Tribunal held that the assessee’s only contention was that the lower authorities ought to have computed FMV based on ‘reverse indexation method’. Undisputedly, there was no such method prescribed in the Income-tax Act 1961. However, the modus in this method was such that the present ‘sale-consideration’ of the sold asset was divided by the present inflation index and multiplied by the inflation index as of 1-4-1981. The Bench indicated to the assessee that this method was the last resort when no other basis was available for the determination of FMV.

In the instant case, the AO referred to the DVO, who gave a detailed explanation of his estimation in his report. The DVO also mentioned the method of valuation he adopted as ‘FMV by Collectors Guidelines for registration of immovable property’.

Since DVO’s work was based on a strong, undisputable method, the ‘reverse indexation method’ cannot be allowed. Consequently, the order of AO in accepting FMV reported by DVO was correct.

The post ‘Reverse Indexation Method’ Can’t Be Allowed if DVO Prepared Report Based on Strong Undisputable Method | ITAT appeared first on Taxmann Blog.