It is true that fixed deposits (FDs) are a safer investment option when compared to debt funds. Debt funds are sensitive to interest rate fluctuations unlike an FD which offers a fixed interest rate for a fixed tenure. But the most important difference between these two is the tax treatment on gains.
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| The interest earned on a fixed deposit is to be added on to your income irrespective of the term of the FD. Further, there is no distinction between short or long term capital gains tax in FDs. This overall reduces the yield of a fixed deposit, especially if you fall in the 30 per cent tax bracket.
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| What makes debt funds a better choice is the tax treatment on its gains. Just like FDs, if you redeem a debt fund within one year then you need to add the gains to your income (Short-term capital gains).
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| In case you redeem the investment after one year (long-term capital gains) you can avail the indexation benefit. Indexation helps you pay tax only on the real gains after adjusting for inflation
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| I had invested Rs 1 lakh in 2006 in the HDFC Tax Saver ELSS. Kindly tell me about the tax implication (long term capital gains tax/income tax) when I redeem the investment in 2009. Will the profit/principal or both be included in the income for year 2009?
- Ranjeet Jha HDFC Tax Saver is an equity linked saving scheme (tax saving mutual fund). As it is an equity oriented fund (those with equity exposure greater than 65 per cent), there would be no tax liability on the redemption amount. The income in the form of dividends (if any) from an equity fund are also tax free in the hands of the investor.
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| If a retired individual (age 60) wants to invest 50 per cent of the retirement corpus in mutual funds, what are the options available with him if equity exposure is to be kept at a minimum level? Is an MIP advisable? Is the monthly income tax free? Also kindly suggest some suitable schemes.
- Tejas Joshi If you wish to have minimal or no equity exposure then you should opt for pure debt funds.
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| These funds invest in debt instruments and have lower risk associated when compared to equities. MIPs or Monthly Income Plans have varied equities component which depends on the mandate of each scheme.
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| Some MIPs can even have equity component in the range of 20-25 per cent. So you would need to figure out the equity exposure you require before investing in a particular MIP. The monthly income from these MIPs (in form of dividends) is absolutely tax free in the hands of the investors.
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| Though you should keep in mind that these dividends are not guaranteed.
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| I am an NRI. I am planning to invest Rs 3 lakh in HDFC MIP and systematically transfer Rs 3,000 per month to HDFC Top 200. Could you please enlighten me on the capital gains implications and TDS (tax deducted at source) applicable? Is it a good idea to invest this way or just transfer it from a bank account?
- Agnello D'Souza HDFC MIP is a hybrid fund which can invest up to 25 per cent of its assets in equities. The fund also falls in above average risk grade and has standard deviation (a measure of volatility) on the higher side when compared to similar funds.
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| It would be a better strategy if you invest the amount in a pure debt fund like HDFC High Interest or HDFC Income. You can then do an STP (systematic transfer plan) to HDFC Top 200 from any of these funds.
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| Computing taxes when you opt for an STP could rather be complicated. When an STP is processed, it is an automatic redemption of the debt fund and a purchase of an equity fund. In such a case you would have to pay necessary tax on the gain of the debt fund. There is no TDS that is deducted by the fund house.
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| You need to disclose the gain while filing your income tax return. You must note that indexation benefit will be available only on the transfer of investment held for one year.
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I invested Rs 10,000 in the Reliance Growth fund (G) on October 1, 2006. I redeemed my investment on September 28, 2007. I received Rs 15,000 by direct credit on October 3, 2007. Which date will be considered for capital gains computation
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