2d-CMP L1 Unit 2 Retail Investment Products 2 (D)

Capital Market Professionals
Level 1
Unit 2: Retail Investment Products
2 (D) Taxation
©Times Centre for Learning Limited (TCLL), 2015

Methodology to Complete this Module
Step 1: Participants are expected to study the anchor module at least once before anchor lecture (Pre-Read)
Step 2: Anchor lecture will introduce the module to Participants
Step 3: At the end of anchor lecture Participants are expected to study this module presentation a few times (Post-
Read)
Step 4: Participants should complete reading all articles under Module Archive around Unit– 1 on the learning portal
Step 5: Participants should use internet & self initiated research to understand details of topics where their interest
lies or any doubt exists
Step 6: End of anchor module is characterized by a quiz or project or both depending upon the scope of your
individual program
Step 7: Learners are advised to completely access & study all elements of the program – anchor module, anchor
lecture, module archive and assignment
Step 8: Module Archives will be updated with articles and videos every month, learners are expected to view the
latest month's articles & videos to keep themselves updated
Participants are advised to keep developing their knowledge base on these subjects by reading business publications throughout their career.

Module Objectives Learning Objectives
At the end of this module, you will be able to:
Explain the concept of Taxation
Define Personal Income Tax Slabs
Identify the impact of taxes on the returns of financial

products
Explain the concept of Capital Gains Tax
Describe Dividend Distribution Tax and it’s impact on

Mutual Funds
Note: All tax rates mentioned in this module are for Financial Year 2015-16 and Assessment Year 2016-17.
At the time of publishing, the Union Budget 2015-16 is pending approval, participants are advised to keep
themselves updated with the latest news updates.

Unit 2 (D)
Taxation

“Certainty? In this world nothing is certain but death and taxes.” ― Benjamin
Franklin
A tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal
entity) by a state or the functional equivalent of a state such that failure to pay is
punishable by law.
Income Tax is a tax on the money people earn or on the profits companies make which is
paid to the national, state, or local government.

Why Bother About Tax?
Individual Taxation and taxation of investment products are of utmost importance to a

Retail Financial Services Professional for the following reasons:
(1) Personal Taxation rules and tax savings instruments trigger demand for many
investment products offered by retail banks
(2) Majority of life insurance and health insurance products sold by Financial Service
Professionals (FSPs) to their customers are primarily motivated by tax benefits accruing
to the customer
(3) Changes in taxation of investment proceeds can quickly alter the attractiveness of an
investment product
(4) Knowledge of taxation also helps the banking professional offer a correct comparison
of various products while soliciting investments to a customer for example with Dividend
Distribution Tax on Debt Funds being raised to 25% there is not much of short-term
difference between FD and Debt Fund

Why Bother About Tax?
Always remember
Knowledge of latest taxation rules on various investment products and personal

income tax can help you make a wining pitch most of the time
Only way to keep yourself updated of developments in this space is to stay

abreast of business newspapers, especially the personal investment section
The scope of this module is to sensitize you to top 3 taxation issues related to an
investor.
There are many other aspects which require regular following of business news to stay
updated.

How Does Taxation Affect Attractiveness of a Financial Product?
Product 1: Krack Bond Product 1: Jack Deposit

Feature: Offers 8% return on a Feature: Offers 10% return on a
Face Value of Rs.10,000 for 1 year Deposit of Rs.10,000 for 1 year
Mr. Vikas decides to buy Jack Deposit because if offers higher returns. He tells his banker
“Krack Bond will have an investment proceed of Rs.10,800/- after 1 year, whereas Jack
Deposit will fetch him Rs.11,000/- as investment proceeds.” Obviously he will go for Jack
Deposit!

How Does Taxation Affect Attractiveness of a Financial Product?
Next day there is an announcement in newspapers that all deposits like Jack Deposit will
be taxed as per the tax slabs of individuals where as Krack Bond returns will be taxed at
flat 10%
Mr. Vikas earns more than Rs.10L per annum and therefore is in 30% tax bracket.
He realises:
• Rs.10,000 invested in Jack Deposit will fetch 11,000 - 1000x30% = 10700 (Investment
Proceeds minus Tax)
• Rs.10,000 invested in Krack Bond will fetch 10,800 – 800x10% = 10720 (Investment
Proceeds minus Tax)
Mr. Vikas realises Krack Bond has turned out

to be more attractive simply because of change
in tax treatment!

Personal Income Tax

Basic Personal Tax Jargons
Financial Year (FY)/Previous Year(PY) – Duration of one year between 1st April to 31st
March of the year, in which all financial information are reported. The current financial
year is 1st April 2015 to 31st March 2016.
Assessment Year (AY) – The income of a particular financial year is assessed in the
following financial year, which is known as the assessment year. For the current financial
year, income will be assessed in the assessment year 2016-2017.
Exemption -
Amount allowed to be reduced from specific source of income for computing tax liability
Rebate -
Amount allowed to be reduced from total tax payable
Deduction-
Amount allowed to be reduced from total income under each head for computing
Refund-
Refers to the excess amount of tax paid back to the tax payer
BOI - Body of Individual, AOP - Association of Persons, HUF - Hindu Undivided Family

Latest Personal Income Tax Slabs for FY 2015-2016
India Income tax slabs 2015-2016 for General tax payers and Women
below 60 Yrs of Age
Secondary and higher
Net Income Range Income Tax Rates Education cess
education cess
Up to Rs. 2,50,000 No Tax Nil Nil
10% of (total income –
Rs. 2,50,000 – 5,00,000 2% of income tax 1% of income tax
2,50,000)
Rs. 5,00,000 – 25000 + 20% of (total
2% of income tax 1% of income tax
10,00,000 income – 5,00,000)
125000 + 30% of (total
Above Rs. 10,00,000 2% of income tax 1% of income tax
income – 10,00,000)
Note
• This slab is based on Union Budget 2015-16
• In order to stay updated about the latest personal income tax slabs one needs to
keep looking for amendments/announcement across newspapers
• In addition a rebate of Rs 2000 is available for income less than Rs 5 lakhs.

• Wealth Tax abolished, Income above Rs.1 crore attracts 12% tax surcharge

India Income tax slabs 2015-2016 for Senior citizens

(Aged 60 years but less than 80 years)
education cess
Up to Rs. 3,00,000 No Tax Nil Nil
3,00,000)
Rs. 5,00,000 – 20,000 + 20% of (total
2% of income tax 1% of income tax
10,00,000 income – 5,00,000)
1,20,000 + 30% of (total
Above Rs. 10,00,000 2% of income tax 1% of income tax
income – 10,00,000)
Note
keep looking for amendments/ announcement across newspapers


India Income tax slabs 2015-2016 for very senior citizens

(Aged 80 and above)
education cess
Up to Rs. 5,00,000 Nil Nil Nil
5,00,000)
1,00,000 + 30% of
Above Rs. 10,00,000 (total income – 2% of income tax 1% of income tax
10,00,000)
Note
keep looking for amendments/ announcement across newspapers


Understanding Income Tax calculations for an Individual
Let us consider net taxable income of Rishi is Rs. 8,00,000
As an assessee, here’s how his tax is calculated:
Calculation
Tax up to Rs. 2,50,000 Nil
Tax on Rs.2,50,000 to Rs.5,00,000 @ 10% 25,000
Tax on Rs. 5,00,000 to Rs. 8,00,000 @ 20% 60,000
Total 85,000
Swachh Bharat cess @ 2%* 1,700
Net Tax Payable 86,700
Is there a way to save some part of this tax by making certain investments for Rishi?
Yes, there is.

There are many sections available under Income Tax act which helps individual reduce
his/her tax liability.
Our focus here is on finding those major income tax sections which offer tax benefits
(because of investments) like section 80C, 80D and Section 24

Tax Saving Instruments under Section 80C
Under section 80C of the Income Tax Act, certain investments are deductible up to a
maximum of Rs 1.5 lakh from gross total income. This tax exemption is available across
individual tax slabs. If one earns Rs 4 lakhs per annum and make investments of Rs 1.5
lakh in 80C instruments then the taxable amount will be Rs 2.5 lakhs.

Depository: Concept & Role in Clearing & Settlement Process Contd.
Equity Linked Savings Scheme (ELSS)

Market
Linked ULIP
PPF
NSC
Tax Saving Tax Saving FDs

Fixed
Instruments
Income Senior Citizen Savings Scheme
under 80C
NABARD Bonds
Employee Provident Fund
Life Insurance Premium
Others Repayment of House Loan (Principal)
Children's Tuition Fees
Many of these instruments are offered by Banks

Understanding Fixed Income & Market Linked Instruments
Fixed Income instruments, which offer fixed returns, are suitable for risk averse
investors who wish to protect their investment from the uncertainties of the market
Most of these instruments are backed by the Government and hence they are risk free
The returns may just beat the inflation and one should not expect any meaningful
appreciation (that is net return after adjusting for inflation) in investments
Per annum returns generally vary from 6% to 10% depending upon the instrument

Understanding Fixed Income & Market Linked Instruments
Market linked products are ELSS (Equity Linked Saving Scheme) and ULIPs (Unit Linked
Insurance Plan).
These instruments invest the money in equities (Except some debt based ULIPs) and
hence there is an inherent market risk.
However, it has been seen that over a long period return from equities beat inflation by
a comfortable margin and create wealth for the investor.
ELSS is similar to mutual fund except that it has a lock in period of 3 years. The money is
invested into diversified stocks by a fund manager/AMC.
On the other hand ULIPs are a form of life insurance where a part of the premium is
invested into equity or debt market (or combination of two). ULIPs usually have longer
lock-in periods.

Tax Saving under Section 80D
Deduction of Rs. 25,000 for medical insurance of self, spouse and dependent children
and
Deduction of Rs. 30,000 for medical insurance of parents above 65 years
Deduction of Rs.30,000 for uninsured super senior citizens (age>80 years) for medical
expenses

Tax Saving from Home Loans
Home loan can be efficiently used to save more tax.
The principal component of the loan, is included under Section 80C, offering a deduction
up to Rs. 1,50,000.
The interest portion offers a deduction up to Rs. 2,00,000 separately under Section 24

Discussion Points
Attractiveness of Insurance Products and ULIPs due to 80C advantage.
Long term Tax-Saving-FDs Vs. Debt Mutual Funds?
How to compare Fixed Income Products with Market Linked Products with
similar tax advantage?

Capital Gains Tax

Capital Gains Tax
At the time of sales of any asset, tax is liable to be paid on the gains earned on the
sales of asset.
Such gains will either be Short-Term Capital Gain or Long-Term Capital Gain.
The basis of classification for Short-Term and Long-Term, as defined by Income Tax
rules is as follows:
Short Term Capital Gains: If the Asset is held for less than 36 Months
Long Term Capital Gains: If the Asset is held for more than 36 Months
Capital Gains Tax Rate:
Short Term Capital Gains Tax Rate: As per normal Income Tax Slab Rate
Long Term Capital Gains Tax Rate: 20% on the gains

Capital Gains Tax
Capital Gain treatment of Equity Assets like Shares and some specific Equity Oriented
Mutual Funds
Short Term Capital Gains: If the Asset is held for less than 12 Months
Long Term Capital Gains: If the Asset is held for more than 12 Months
Capital Gains Tax Rate:
Short Term Capital Gains Tax Rate: 15%
Long Term Capital Gains Tax Rate: Exempt

Capital Gain Treatment for Shares & Specific Mutual Fund
The special treatment for Capital Gains period of classification of 12 months is

applicable only in specific following cases:
Asset is in the form of Shares (on which STT*) has been paid
Equity Oriented Mutual Fund (as specified under section 10(23D)
Units of UTI
Zero Coupon Bond
*STT: Securities Transaction Tax (STT) is a tax applied on purchase and sale of equity,
derivatives and mutual funds. While buying or selling stocks the STT rate is 0.1% of the
total transaction value and while selling equity oriented mutual funds the STT
applicable is 0.001% (These rates are for delivery based transactions).

Capital Gain Treatment for Shares & Specific Mutual Fund
Two critical aspects for us to note here:
An Equity Mutual Fund Investors can escape capital gains tax if the equity mutual fund is
specified under Section 10(23D) and
The investor stays invested for a minimum of 12 months

Dividend Distribution Tax for
Mutual Funds

Dividend Distribution Tax for Mutual Funds
DDT is the tax that Debt Mutual Funds (MFs) pay on the dividend income distributed to
retail investors.
Although dividends from Mutual Funds are tax-free in the hands of the investor, your Debt
Fund deducts DDT from the income earmarked for distribution, and gives the rest to
investors.
According to the budget proposals for the year starting 1 April 2014, DDT paid by all types
of Debt Funds (Liquid Funds and other Debt MFs) to retail investors is 25%.

Dividend Distribution Tax for Mutual Funds
If 25% DDT is applied on debt funds then there is almost no

difference between an FD and a Debt fund (in short term)
because both have similar tax implications
How does it Impact

Us? The only difference left between them is the flexibility of
tenure in case of Debt Fund, where as FD generally has a
fixed term
Again with 25% DDT applicable on debt MF, Fixed Deposit

schemes floated by top corporates become attractive

“Budget 2013: Increase in Dividend Distribution Tax Makes
Company Fixed Deposits Attractive” ET Bureau Mar 2, 2013, (Part-1)
MUMBAI: Company fixed deposits are expected to make a strong come back after
finance minister increased dividend distribution tax (DDT). Earlier the interest earned by
company fixed deposits was clubbed to income of the individual and taxed at marginal
rate of tax, which is 20.6% (for investors in 20% tax bracket) and 30.9% (for investors in
30% tax bracket) and the dividends on the debt funds (other than liquid funds) were
taxed at 13.5%. This made individuals in 20% and 30% with income needs consider
investments in dividend option of debt funds

“Budget 2013: Increase in Dividend Distribution Tax Makes
Company Fixed Deposits Attractive” ET Bureau Mar 2, 2013, (Part-1)
However in the budget for FY2013-2014 finance minister has hiked the DDT and also
increased the surcharge. That results in an effective rate of tax of 28.33% on dividends
declared by all debt funds. This new tax rule is effective from June 1.
"This has surely made company fixed deposits attractive, and some debt fund investors
can consider investing in company fixed deposits," says Anil Chopra, CEO and director,
Bajaj Capital. However he further points out that you have to be doubly sure about the
quality of the company fixed deposits you are investing into. Company fixed deposits do
come with extra risk compared to a debt fund.
Premature withdrawal of company fixed deposits attracts penalty and partial
withdrawals are not allowed. If you are comfortable with 'locked in' investments for one
year, you can surely go for fixed deposits of good companies. AAA rated one year
company fixed deposits offer around 9% rate of interest whereas one year unrated
company fixed deposits offer between 7.5% and 12%

Five Things You Need to Know About Dividend Distribution Tax
(DDT) ET Aug 4, 2014
Here are five things you need to know about Dividend distribution tax (DDT):
1. The Finance Bill 2014-15 has modified the manner in which the dividend distribution
tax is computed with effect from 1 October 2014
2. DDT is payable before the distribution of dividend by non equity mutual funds that
do not have at least 65% of the assets invested in equity shares
3. If a mutual fund intends to pay Rs 100 as dividend, and if the DDT was 25 per cent,
the fund would earlier pay Rs 20 (25 per cent of Rs 80) as DDT to the government
and Rs 80 as dividend
4. This method will now change to gross computation, wherein of the Rs 100, Rs 25
would be paid as DDT and the balance Rs 75 will be paid to the investor
5. The DDT will apply on the distributable dividend, not the actual payout. Therefore,
the net payout to the investor will now be lower

Discussion Points
Discuss the pro & cons of an ELSS scheme from returns and tax perspective,
compare returns across 5 years
Discuss the impact of rising tax rates on returns of Fixed Income and Equity
Mutual Fund investments
Discuss the impact of 40% increase or decrease in exemption limit under

section 80C of Income Tax Act
Discuss impact of stable tax rate structure and rising inflation on portfolio of
Salaried Individual and Senior Citizens

Explore Yourself
Explore whether US, UK & China have an equivalent of Capital Gains Tax
Compare the personal income tax rates and tax slabs in US, UK & China
Explore tax rates in India for NGOs, Charitable Organizations, Co-operative

Societies etc.

Summary
Points to Note for Client Queries
At the end of this module, you can now:
• Explain the concept of Taxation
• Define Personal Income Tax Slabs
• Identify the impact of taxes on the returns of financial

products
• Explain the concept of Capital Gains Tax
• Describe Dividend Distribution Tax and it’s impact on

Mutual Funds

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2d-CMP L1 Unit 2 Retail Investment Products 2 (D)

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Capital Market Professionals

©Times Centre for Learning Limited (TCLL), 2015

Step 2: Anchor lecture will introduce the module to Participants

©Times Centre for Learning Limited (TCLL), 2015

At the end of this module, you will be able to:

Explain the concept of Taxation

Define Personal Income Tax Slabs

Identify the impact of taxes on the returns of financial

Explain the concept of Capital Gains Tax

Describe Dividend Distribution Tax and it’s impact on

©Times Centre for Learning Limited (TCLL), 2015

©Times Centre for Learning Limited (TCLL), 2015

©Times Centre for Learning Limited (TCLL), 2015

Individual Taxation and taxation of investment products are of utmost importance to a

©Times Centre for Learning Limited (TCLL), 2015

Knowledge of latest taxation rules on various investment products and personal

Only way to keep yourself updated of developments in this space is to stay

©Times Centre for Learning Limited (TCLL), 2015

Product 1: Krack Bond Product 1: Jack Deposit

©Times Centre for Learning Limited (TCLL), 2015

Mr. Vikas realises Krack Bond has turned out

©Times Centre for Learning Limited (TCLL), 2015

©Times Centre for Learning Limited (TCLL), 2015

©Times Centre for Learning Limited (TCLL), 2015

• In addition a rebate of Rs 2000 is available for income less than Rs 5 lakhs.

©Times Centre for Learning Limited (TCLL), 2015

India Income tax slabs 2015-2016 for Senior citizens

• In addition a rebate of Rs 2000 is available for income less than Rs 5 lakhs.

©Times Centre for Learning Limited (TCLL), 2015

India Income tax slabs 2015-2016 for very senior citizens

• In addition a rebate of Rs 2000 is available for income less than Rs 5 lakhs.

©Times Centre for Learning Limited (TCLL), 2015

Let us consider net taxable income of Rishi is Rs. 8,00,000

As an assessee, here’s how his tax is calculated:

Yes, there is.

©Times Centre for Learning Limited (TCLL), 2015

©Times Centre for Learning Limited (TCLL), 2015

Equity Linked Savings Scheme (ELSS)

Tax Saving Tax Saving FDs

Employee Provident Fund

Life Insurance Premium

Others Repayment of House Loan (Principal)

Children's Tuition Fees

Many of these instruments are offered by Banks

©Times Centre for Learning Limited (TCLL), 2015

©Times Centre for Learning Limited (TCLL), 2015

Deduction of Rs. 30,000 for medical insurance of parents above 65 years

©Times Centre for Learning Limited (TCLL), 2015

Home loan can be efficiently used to save more tax.

©Times Centre for Learning Limited (TCLL), 2015

Attractiveness of Insurance Products and ULIPs due to 80C advantage.

Long term Tax-Saving-FDs Vs. Debt Mutual Funds?

©Times Centre for Learning Limited (TCLL), 2015

©Times Centre for Learning Limited (TCLL), 2015

Capital Gains Tax Rate:

Long Term Capital Gains Tax Rate: 20% on the gains

©Times Centre for Learning Limited (TCLL), 2015

Capital Gains Tax Rate:

Short Term Capital Gains Tax Rate: 15%

Long Term Capital Gains Tax Rate: Exempt

©Times Centre for Learning Limited (TCLL), 2015

The special treatment for Capital Gains period of classification of 12 months is

Equity Oriented Mutual Fund (as specified under section 10(23D)