Some investors tend to invest globally as a part of diversifying their investments. To encourage them, mutual fund companies are coming with new NFO’s(New Fund Offers)to invest globally. Some amc’s(Asset Management Companies)are already offering international mutual funds.
Though diversifying investments globally is welcome-note, one should know the taxation rules on them!
Taxation on International Mutual Funds– Some investors assume that tax on investing in international equity mutual funds is same as investing in domestic mutual funds. But this is a misconception!
According to Indian laws, Equity Mutual Funds have to invest at least 65-70% of their investments in domestic market.
As international mutual funds invests major portion globally, they can’t be treated as “Equity Funds”. Though these funds are equity funds, the taxation on the international fund varies!
Taxation on International Funds are considered to be “Debt Funds” as they are not investing 65-70% in the Indian market.
Taxation on Debt Funds-Short Term Capital Gains Tax on Debt funds is applicable if the investor sells his mutual fund units within 3 years from the date of allotment. The gain is added to the income of the investor and taxed as per his applicable tax slab.
Long-Term Capital Gains on Debt Funds would be applicable if the investor sells his mutual fund units after 3 years from the allotment date with 20% with indexation benefit(adjusted to inflation)or 10% without indexation benefit; which ever is applicable.
So before redeeming an international mutual fund, aware of the tax laws and plan your redemptions as per the applicable tax structure. Do remember tax on International funds are treated as Debt Funds instead of equity funds as they invests major portion globally.