Tax implication for the Fund in respect of its schemes (being an equity oriented fund/other than equity oriented fund/money market mutual fund/liquid fund) and the unit holders (on the assumption that units are not held as stock-in-trade) as per the taxation laws in force:

The entire income of Fund registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder will be exempt from income tax in accordance with the provisions of section 10(23D) of the Income-tax Act, 1961. Consequently, income received by the Scheme is not liable for deduction of tax at source

The value of a taxable securities transaction will be as follows.

“Taxable securities transaction” has been defined as a purchase or sale of equity shares in a company or a derivative or a unit of an equity oriented fund, entered into a recognized stock exchange; or sale of a unit of an equity oriented fund to the Mutual Fund

Under section 115R of the Income tax Act, 1961, any amount of income distributed by Mutual Fund to its unitholders is chargeable to tax. As per prevailing taxation laws in force, the Dividend Distribution Tax payable by Principal Mutual Fund on Income Distributed to its unitholders is as under:

* Plus applicable surcharge, education cess and secondary & higher education cess.
 ^ “Money Market Mutual Fund” means a Money Market Mutual Fund as defined in sub-clause (p) of clause (2) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.
 ^^ “Liquid Fund” means a scheme or plan of a Mutual Fund which is classified by Securities and Exchange Board of India as a Liquid Fund in accordance with the guidelines issued by it in this behalf under the Securities and Exchange Board of India Act, 1992 or regulations made thereunder.
 # “Equity Oriented Funds” means “such fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than Sixty five percent of the total proceeds of such fund”. The percentage of Equity share holding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures.

An investment by an Individual or a Hindu Undivided Family in the ELSS scheme will entitle the investor to a deduction from their Gross Total Income as provided under clause (xiii) of section 80C(2) of the Income Tax Act, 1961. The maximum deduction permissible under this section is Rs. 100,000/- in a year, subject to availability of gross total income of the assessee.

Under the provisions of section 10(35) of the Income-tax Act, 1961, income received by all categories of unitholders from the Scheme will be exempt from income tax in their hands. In view of this position, no tax needs be deducted at source from such distribution by the scheme. However, income from the transfer of Units of a mutual fund is not exempt from taxation.

Long term capital gains arising on or after October 01, 2004 (i.e. after the date on which the STT comes into force) from the transfer of units of an Equity Oriented scheme (as defined u/s. 115T of the Income Tax Act, 1961) would be exempt from Income-Tax as per section 10(38) of the Income-Tax Act, 1961. The mutual fund would recover STT @ 0.25% from the unitholder when units are re-purchased by the mutual fund/ redeemed by the investor

Long-term Capital Gains in respect of Units held for a period of more than 12 months are chargeable under section 112 of the Income-Tax Act, 1961 at the rate of 20% (plus applicable surcharge, education cess and secondary & higher education cess). Capital gains would be computed after taking into account cost of acquisition, as adjusted by Cost Inflation Index notified by the Central Government and expenditure incurred wholly and exclusively in connection with such transfer. In a case, where taxable income, as reduced by long term capital gains, is below the exemption limit, the long term capital gains will be reduced to the extent of the shortfall and only the balance long term capital gains will be charged at the flat rate of 20% (plus applicable surcharge, education cess and secondary & higher education cess).

It is further provided that an assessee will have an option to seek concessional rate of tax of 10% (plus applicable surcharge, education cess and secondary & higher education cess), provided the long term capital gains are computed without substituting indexed cost in place of actual cost of acquisition.

Long-term Capital Gains in respect of units held for a period of more than 12 months will be chargeable under section 112 of the Income-Tax Act, 1961, at the rate of 20% (plus applicable surcharge, education cess and secondary & higher education cess). Capital gains would be computed after taking into account cost of acquisition, as adjusted by Cost Inflation Index notified by the Central Government, and expenditure incurred wholly and exclusively in connection with such transfer.

It is further provided that an assessee will have an option to avail of the concessional rate of tax of 10% (plus applicable surcharge, education cess and secondary & higher education cess) on long term capital gains computed without adjusting cost for indexation.

Under section 115AB/115AD of the Income-Tax Act, 1961, long term capital gains in respect of units held for a period of more than 12 months will be chargeable at the rate of 10% (plus applicable surcharge, education cess and secondary & higher education cess). Such gains would be calculated without indexation of cost of acquisition.

Loss arising on transfer of a long term capital asset can be set off only against other long term capital gains and not against any other income. If there is nil or inadequate long term capital gains in any year, the loss remaining will be allowed to be carried forward to the next year upto a maximum of 8 years.

Short term capital gains arising on or after October 01, 2004 (i.e. after the date on which the STT comes into force) from the transfer of units of an equity oriented scheme (as defined under Section 115T of the Income Tax Act, 1961) would be charged to tax u/s. 111-A of the Income Tax Act, 1961 @ 10% (plus applicable surcharge, education cess and secondary & higher education cess). The mutual fund would recover STT @ 0.25% from the unitholder when units are re-purchased by the mutual fund/ redeemed by the investor

Short term capital gains are taxed at the normal rates applicable to each unitholder. Loss arising on transfer of a short term capital asset can be set off only against other short term capital gains or long term capital gains. If there is nil or inadequate capital gains in any year, the loss remaining will be allowed to be carried forward to the next year upto a maximum of 8 years.

As per section 94(7), if any person buys or acquires units within a period of three months prior to the record date fixed for declaration of dividend, or distribution of income, and sells or transfers the same within a period of nine months from such record date, then capital losses arising from such sale to the extent of dividend or income received or receivable on such units will be ignored for the purpose of computing his income chargeable to tax.

Similarly, as per section 94(8), if any person buys or acquires units within a period of three months prior to the record date fixed for declaration of bonus units and sells or transfers the same within a period of nine months from such record date, then capital losses arising from such sale will be ignored for the purpose of computing his income chargeable to tax and the loss so ignored shall be deemed to be the cost of the bonus units.

Short term Capital Gains in respect of Units held for a period of not more than 12 months is added to the total income. Total income including short-term capital gains is chargeable to tax as per the relevant slab rates. The maximum marginal tax rates applicable to different categories of assessees are as follows:

As per circular no. 728 issued by CBDT in October 1995, in the case of a remittance to a country with which a Double Taxation Avoidance Agreement (DTAA) is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in DTAA between India and that country whichever is more beneficial to the tax payer.

Under section 54EC of the Income Tax Act, 1961, where a tax payer has made long term capital gains from the transfer of units held in the Mutual Fund for a period exceeding 12 months and the assessee has any time within a period of 6 months after the date of such transfer, invested the whole of the capital gains in any of the specified assets i.e., in bonds redeemable after 3 years issued by the National Bank for Agriculture and Rural Development, or by the National Highways Authority of India or by the Rural Electrification Corporation Limited or by The National Housing Bank or by the Small Industries Development Bank of India, such capital gains shall be exempted from tax on capital gains under section 54EC of the Income Tax Act, 1961. However, if the assessee has invested only a part of the capital gains, he will be eligible for proportionate exemption.

Under Section 54ED, whereby the capital gains arising from the transfer (before the 1 st day of April 2006) of units held in the mutual fund for a period exceeding 12 months will be exempt, if the assessee has, any time within a period of 6 months after the date of such transfer, invested the whole of the capital gains in acquiring equity shares forming part of an eligible issue of capital. However, if the assessee has invested only a part of the capital gains, he will be eligible for proportionate exemption. An eligible issue of capital means an issue of equity shares offered for subscription to the public by a public company formed and registered in India.

The scheme may be impacted by the rates of taxation on capital gains, interest and other corporate actions on investment by non resident mutual funds, in different countries of investment, in line with the prevailing tax laws in those countries of investment, as also in line with the respective tax treaties in existence with India

Units of the Scheme constitute an eligible avenue for investment by charitable or religious trusts per rule 17C of the Income Tax Rules, 1962, read with clause (xii) of sub-section (5) of section 11 of the Income Tax Act, 1961.

Units held under the Scheme are not treated as assets within the meaning of section 2(ea) of the Wealth Tax Act, 1957 and are, therefore, not liable to Wealth-Tax.