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Taxation of international mutual funds explained by an example

This article explains how international mutual funds are taxed with an example. All mutual funds that do not hold a minimum of 65% Indian stocks or Indian stock-based ETFs are referred to as “non-stock” mutual funds by the Department of Income Tax. They are taxed at the rate of 20% with indexation.

In the case of non-equity mutual funds, the cost inflation index for the year of purchase and the year of redemption is required to calculate the tax, provided the purchase was made there more than three years ago. The Cost Inflation Index (CII) for fiscal year 2022-22 is 331. For a purchase made in May 2017, the relevant CII would be 272 (for fiscal year 2017-2018).

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Take, for example, the FT US Feeder fund. It is obviously an international equity fund. Assume that Rs,10,000 invested in mid-2017 is now worth around Rs. 18,000. This is an absolute capital gain of Rs. 8,000.

Income tax allows us to increase the purchase price using the ITC and calculate the capital gain. To do this, we ask if Rs. 10,000 corresponded to CII = 272, what amount would correspond to CII of 331?

Inflation-adjusted purchase price = purchase price x ITC in the year of sale / ITC in the year of purchase

In this case, inflation-adjusted purchase price = 10,000 x 331/272 = 12,169 (approximately).

When an SIP is involved, the index purchase of each installment (over different fiscal years) must be calculated. You don’t have to worry about calculating the indexed purchase price. CAMS or KFintech Capital Gains Reporting provides this data.

Actual capital gain = Rs. 18,000 – rupees. 10,000 = rupees. 8000

Inflation-adjusted capital or indexed capital gain = Rs. 18,000 – rupees. 12,169 = Rs. 5831.

We have to pay 20% tax + 10% surcharge + 4% = 22.88% on Rs. 5831 instead of Rs. 8000. So a tax of Rs. 1334 has to be paid and the actual capital gain after tax = Rs.8000-Rs. 1334 = rupees. 6666.

Use our guides to enter capital gains in ITR Forms 2 and 3

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