Tax Efficiency of Balanced Advantage Funds

-

Indian investors, possibly more than investors globally, pay attention to the tax bill for their investments. This is particularly true of our middle class and novice investors aspiring to nurture their wealth. As financial ambitions intersect with tax-saving goals, the selection of investment vehicles becomes a strategic endeavor, necessitating a deep understanding of tax-efficient options.

For many Indians, tax-saving investments represent a critical avenue for wealth creation. But, the key is choosing investment instruments that not only yield returns but also shield those returns from the erosion caused by taxes.

Navigating the Quandary of Tax-Saving Investments in India

The Indian landscape of tax-saving investments can be challenging. Of course, the overarching goal of investments isn't mere tax-saving; but outpacing inflation and securing sustainable growth. To this end, the focus should shift from conventional "tax-saving" investment vehicles to those that not only facilitate substantial earnings but also preserve a substantial portion of these earnings post-taxation. When we consider things from this angle, Balanced Advantage Funds or BAFs are a great option to explore.

Exploring Balanced Advantage Funds and Their Tax Efficiency

BAFs represent a dynamic and forward-thinking approach to tax-efficient investments. These funds are designed to maintain an optimal balance between equities and debt instruments, thereby capitalizing on market opportunities when the markets are bullish while mitigating risks when a market correction occurs. 

Tax efficient asset allocation 

But what makes BAFs even more attractive is their tax efficiency. Majority of BAFs in India are treated as equity funds for taxation purposes. This means that they enjoy the same tax benefits as pure equity funds, which are lower than debt funds. Let's see how this works.

According to the current tax laws, the capital gains from equity funds are taxed as follows:

• Short-term capital gains (STCG), i.e., gains from units held for less than one year, are taxed at 15%.
• Long-term capital gains (LTCG), i.e., gains from units held for more than one year, are exempt up to Rs. 1 lakh per annum. Any excess amount is taxed at 10%.

• STCG and LTCG are added to the investor's income and taxed as per their income tax slab rate.
• LTCG on gains on investments before 31st March are taxed at 20% with indexation benefit, which means that the cost of acquisition is adjusted for inflation.

Now, when investors manually move their money between equity and debt, they could be subject to taxes on the capital gains made in the short term. However, when fund managers move between the two asset classes as a part of their routine rebalancing, they need not pay these taxes because of the way the fund is structured. Furthermore, even after the rebalancing, the tax treatment of the fund continues to remain equity-oriented, which is ultimately beneficial for investors, as we've just seen above. 

Read More

Tax on Dividends

Dividends from equity-oriented funds taxable in the hands of the investor at the income slab, prompting investors to reassess dividend strategies in favor of capital appreciation.

Systematic Withdrawal Plans (SWPs)

Investors seeking regular income can opt for SWPs, which are considered more tax-efficient than dividends. By withdrawing only some of their investment, of which the capital gains portion is subject to lower tax rates than dividends, investors can efficiently manage their tax liability.

Add a Smart AdvantEdge to your investment strategy by exploring Balanced Advantage Funds here. 

Disclaimer

One-time KYC (Know Your Customer) is mandatory to invest in mutual funds. You can complete your eKYC here: https://invest.sundarammutual.com/. Investors must deal with/invest in only SEBI Registered Mutual Funds. Details are available at www.sebi.gov.in. Complaint Redressal: Investors can reach us on 1860 425 7237 or write to us at customerservices@sundarammutual.com. For escalation, write to grievanceredressal@sundarammutual.com or lodge your grievance with SEBI through their SCORES (SEBI Complaint Redressal System) Portal at https://scores.gov.in. If you are still not satisfied with the redressal from SEBI SCORES, you can further initiate dispute resolution through the ODR Portal at https://smartodr.in/login.

An Investor Education initiative by Sundaram Mutual.
Mutual fund investments are subject to market risks, please read all scheme related documents carefully before investing.

Moneycontrol Journalists were not involved in the creation of the article.