Taxation on debt mutual funds
Investors many a times invest in debt mutual funds blindly without knowing the implication of tax on the returns. The implication of taxation in a debt fund is very critical and the most misunderstood. Financial expert Juzer Gabajiwala decodes taxation aspect on debt funds for the investors.
June 24, 2013 / 12:59 IST
Taxation is normally considered a hassle by many investors. In this issue we try to decode the taxation aspect on debt funds for the investors. The implication of taxation in a debt fund is very critical and the most misunderstood. An investor in debt fund needs to check the implication of tax which plays an integral role on the returns in the hand of the investor. So, let us see the Tax Implication on Debt Mutual Funds.
Capital GainsShort Term Capital Gains (STCG)Any profit or loss made in a debt fund where the period of holding is less than 365 days, is classified as short term and these are taxed as per the income tax slab of the individual based on his total income. The slabs are as under:-Income Tax Slabs – (Individual/ HUF)| Taxable Income (Rs) | Tax Rate (%) |
| Up to 2,00,000 | Nil |
| 2,00,001 - 5,00,000 | 10% |
| 5,00,001 - 10,00,000 | 20% |
| Above 10,00,001 | 30% |
Notes:-
1. Finance Bill 2013 proposes a rebate of Rs. 2,000/- for individuals having Total Income upto Rs. 500,000/-
2. 60 years and Above but below 80 Yrs, the basic exemption limit is Rs. 250,000/-
3. 80 years and Above, the basic exemption limit is Rs. 500,000/-
4. Education Cess is applicable at the rate of 3% of Income Tax across all Tax slabs
5. 10% Surcharge is applicable on income exceeding Rs. 1 crore.Long Term Capital Gains (LTCG) Any profit or loss made in a debt fund where the period of holding is more than 365 days, is classified as long term. These are taxed as per the table mentioned below.| Long Term Capital Gain Tax | 10% without Indexation or 20% with Indexation
whichever is LESS plus education cess 3% |
* - 366 days in case of leap year
# - in case income is more than Rs. 1 crore, surcharge @10% is applicable
Indexation plays an important role on Long Term Capital Gain Tax. The tax is levied only if the investor redeems the fund or switches from one scheme to another. Indexation means adjusting the price of an asset for inflation i.e. the cost price of an asset is adjusted so that any increase in price of the asset due to inflation is factored in. Inflation is measured every financial year and the value is known in the Cost Inflation Index (CII). Through indexation, one can bring the cost of investment in the debt fund to the current value, after factoring the rise in price (inflation). CII is declared by the Government every year.If one needs to take the benefit of indexation, one should know how it works. This is shown in the example below:-Investment in Debt Fund from 23rd March 2012 to 25th March 2013 (More than 365 days) Cost Inflation Index (CII) for FY11-12 was 785 and FY12-13 is 852.Return on Investment = 10000*10% for the period = Rs 11,000Calculating Cost of Investment = Investment value * CII (current year/ base year)Cost of Investment = 10,000*852/785 = 10,853Hence Capital Gains = 11,000 – 10,853 = 147Tax (With Indexation) = 147*20.60% = Rs 30OrTax (Without Indexation) = (11,000- 10,000) = 1000*10.30% = Rs 103(Whichever is less)Hence as the cost of investment in the debt fund increased from Rs 10,000 to Rs 10853 due to indexation the tax outgo has been reduced to only Rs 30. Set Off and Carry Forward of Capital Losses: Now let us understand how can the investor can setoff capital losses. The table below depicts the carry forward and set off of capital losses.| If the Loss is: | Same Head | Another Head | Carry Forward Years | Against Profits From |
|
| Long Term | Yes | No | 8 | LTCG |
| Short Term | Yes | Only LTCG | 8 | STCG/LTCG |
Securities Transaction Tax (STT)STT is not applicable in the case of debt oriented mutual fund schemes.Dividend Distribution Tax (DDT)Dividend income is tax free in the hand of investors. However, the mutual fund company has to pay a dividend distribution tax (DDT) before distributing this income to its investors on debt funds. DDT has now been increased for all debt funds from 12.5% to 25%. The effective rate will now be 28.325% on account of a 10% surcharge and 3% education cess. Previously DDT was 13.519%. The effective rate will be 22.073% (calculated as 28.325/128.325) as the DDT is levied on the net amount. Given below is a tabular format on applicability of capital gains and DDT for a more clear understanding depending upon the option exercised by the investor.| Option | Capital Gains Tax | DDT |
| Growth | Yes | No |
| Dividend Payout/ Dividend Reinvestment | Possible | Yes |
Thus while choosing debt funds an investor should consider 2 factors:1. Whether he should opt for dividend or growth option. 2. Secondly, one should always look at post tax returns for debt products comparison which gives a more realistic picture rather than pre tax returns. Else one would be comparing apples and oranges. Our next issue will address the above two concerns.- Juzer Gabajiwala
The aurhor is the Director of Ventura Securities Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
