1.2.1 Capital Gains Tax as a post-allocation load in the system

This topic explains how to define Capital Gains Tax as a load in the system

You can define the Capital Gains Tax as a load in the system, through the Load Maintenance screen, in the Maintenance menu category of the Fund Manager component. You must then associate the load with the funds for which capital gains tax must be deemed as applicable, through the Fund Load Setup screen in the Data Entry menu category of the Fund Manager component.

The Capital Gains Tax is computed and deducted at source from the Redemption or Switch out proceeds, and the balance paid out as the final redemption or switch out amount payable to the investor.

The capital gains from a redeemed or switched transaction is computed in the system as the difference between the buying price of the subscription transaction that is redeemed, and the selling price of the redemption or switched transaction.

The buy price is computed as the sum of actual subscription amount and the loads (typically commissions, entry fees, initial charges and so on as applicable).

The sell price is computed as the actual redemption amount (and, if the investor chooses to redeem by units, the product of number of units applied for and the base price for the transaction) from which all the loads (exit fees, and so on, as applicable) have been deducted.

The following empirical expressions could be considered:

Capital Gains = Selling Price – Buying Price, where

Selling Price = Actual Redemption Amount – All applicable exit charges

And

Buying Price = Subscription Amount + All applicable initial charges and commissions

A database (backend) procedure in the system computes the Capital Gains applicable for each redemption or switch transaction after it is allocated.

The capital gains tax applicable on the computed capital gains is calculated, and the same is reduced from the net amount that proceeds from the redemption or switch transaction to the unit holder.

In the following transaction cycles, that involve more than a single subscription – redemption transaction scenario, capital gains tax is calculated for each individual leg and then the sum of all the computed tax values is reduced from the net proceeds from each redemption transaction.

• Multiple subscription transactions redeemed together
• A single subscription redeemed through multiple redemption transactions
• An initial subscription transferred to a different Unit holder who then redeems the same
• An initial subscription switched to a different fund from which it is subsequently redeemed
• An initial subscription is switched to a different fund

For switch transactions, as shown in the example, the Capital Gains Tax is deducted in a manner similar to that in redemption transactions. The switch is considered as a redemption transaction from one fund and subscription into another. Therefore, the relevant acquisition cost of the subscription is from the switched out amount to arrive at the Capital Gains. The associated Capital Gains Tax is reduced from the switched out proceeds to arrive at the switched in amount. This is reckoned as the subscription amount in the switched in fund.