Taxation of international mutual funds explained with an example

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: August 23, 2022 at 6:00 am

Last Updated on August 24, 2022 at 4:02 pm

This article explains how international mutual funds are taxed with an example. All mutual funds not holding a minimum of 65% of Indian stocks or Indian stock-based ETFs are known as “non-equity” mutual funds by the income tax department. They are taxed at a rate of 20% with indexation.

In the case of non-equity mutual funds, the cost inflation index in the year of purchase and year of redemption is necessary to compute the tax, provided the purchase was made more than three years ago. The Cost inflation index(CII) for FY 2022-23 is 331.  For a purchase made in May 2017, the relevant CII would be 272 (for FY 2017-2018).

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Take, for example, the FT US Feeder fund. This is obviously an international equity fund. Suppose Rs, 10,000 invested in mid-2017 is now worth about Rs. 18,000. This is an absolute capital gain of Rs. 8000.

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The income tax dept allows us to increase the purchase price using the CII and compute 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 CII in the FY of sale/CII in the FY of purchase

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

When there is SIP involved, the index purchase of each instalment (across different financial years) should be computed. There is no need to worry about the indexed purchase price calculation. The capital gains statement from CAMS or KFintech provides this data.

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

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

We need to pay 20% tax + 10% surcharge + cess of 4% = 22.88% on Rs. 5831 instead of Rs. 8000. So a tax of Rs. 1334 is to be paid and the actual post-tax capital gain = Rs.8000- Rs. 1334 = Rs. 6666.

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