123ArticleOnline Logo
Welcome to 123ArticleOnline.com!
ALL >> Investing---Finance >> View Article

Taxation In Debt Mutual Funds

Profile Picture
By Author: Quantum Mutual Fund
Total Articles: 27
Comment this article
Facebook ShareTwitter ShareGoogle+ ShareTwitter Share

Debt Mutual Funds significantly invest the money in fixed-income securities like government securities, debentures, corporate bonds and other money-market instruments. These products carry the low risk compared to Equity. They have low volatility and have potential to generate modest returns over time.

Tax on Debt Funds
Like other Funds, Debt Funds are also subject to capital gains tax, Short-Term Capital Gains Tax (STCG) & Long-term Capital Gains Tax (LTCG). If Debt funds are held for less than 3 years, then STCG is levied and if more than 3 years then LTCG is levied. Presently, the LTCG levied is 20% with indexation and STCG is taxed as per the investor’s tax slab. If the Investor’s Income Tax Slab is 20%, then the same will be levied on the Debt Funds gains in the case of STCG.

Indexation Benefits
Indexation is a tool that is applicable to long-term investments. It helps an investor to adjust inflation while gauging the returns of the invested amount.
As inflation is gradually rising, what’s worth Rs. 1000 could be worth Rs.1100 sooner in the near future. Thus inflation is ...
... reducing the purchasing power of our money. The same amount will be enabling the investor to buy lesser and lesser goods.
So how does indexation help us? To understand that, let us first understand what capital gains is. Capital gains are nothing but the increase in the value of an investment over a specific period of time. If a NAV of a fund was Rs. 10 when you invested and is now Rs.15 while you plan to redeem it, that difference of Rs.5 is called capital gains. So we are yielding a capital gain of Rs.5\unit when we redeem.
In the case of debt funds, we arrive at long term capital gains after indexing the purchase price of the investment. When subjected to indexation, it lowers the long-term capital gains tax, which brings down your taxable income. Indexation is the reason why debt funds are looked upon as an excellent fixed-income investment option.

How does Indexation Work?
The rate used for inflation in indexation is obtained from the Government’s Cost Inflation Index (CII). The Central Government determines the values of the index and is updated on the Income Tax Departments Website. The data is available from 19981 onwards.
Let us consider the below example to understand how indexation works:
Imagine you invested Rs.1,00,000 in May 2015 in a debt fund of your choice. Today you choose to redeem your money. So you have gained Rs. 1,50,000 on your investment. Since your holding period was beyond 3 years you will not need to be required to pay tax on the entire amount of Rs.1.5 lakhs. You will need to arrive at the indexed cost by using the formula:
ICoA = Original cost of acquisition * (CII of the year of sale/CII of year of purchase)
So the indexed cost will be 1,00,000 (240/301) = 79,734.
So our Capital Gains will now be 1,50,000-79,734 = 70,266.
Using indexation, we have managed to reduce the income subjected to tax, which would be Rs. 14,053.2.
The benefit of indexation works best when your holding period is longer. For a holding period of 5 years, on average, the long-term capital gains tax on debt funds can come down efficiently. Thus indexation helps us to save tax on Long-Term Capital Gains and increases our earnings.
Remember, indexation is only subjected to Debt Funds & not applicable to Equity Funds.
Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

More About the Author

Quantum Mutual Fund has over 14 years of experience into mutual funds and puts the needs of investors like you first. Invest in different types of schemes & start an SIP with Quantum Mutual Funds today! Quantum Mutual Fund believes in sustainable growth built with integrity & transparency and are trusted by over 50,000 active investors to achieve their wealth creation goals. Our aim is to generate sensible, risk returns for your investment horizon. Quantum Mutual Fund - Start an SIP in different asset class funds

Total Views: 69Word Count: 831See All articles From Author

Add Comment

Investing / Finance Articles

1. Form 2290 Online Filing For 2021
Author: chloe bennet

2. New York Attorney General Shuts Down Coinseed For Converting Customer Funds Into Dogecoin Without Consent
Author: Joyashree Dey

3. Apply For A Personal Loan Using Instaloan App
Author: Ankit Verma

4. Mortgage Debt Management Can Improve The Credit Score!
Author: FREED FINANCIAL SERVICES LLC

5. 9 Retirement Planning Tips For Young Adults
Author: Financial Planning

6. Managing Your Wealth The Right Way
Author: avendusgroup

7. Ethereum Price Prediction 2022
Author: jessica smith

8. Parameters To Compare Mutual Funds
Author: Quantum Mutual Fund

9. Gold Mutual Funds Vs. Gold Etfs: Where Do Investors Invest?
Author: Quantum Mutual Fund

10. Top 10 Altcoins Institutional Investors Are Focusing On
Author: Ashish - Financial Journalist

11. How To Make Money In Cryptocurrency?
Author: Olivia

12. Bull Market Vs Bear Market
Author: Sophia

13. Getting Usda Home Loans Florida And Georgia Is Much Simpler Than Other Loans - Here’s Why
Author: vikram kumar

14. Is Finding A Usda Construction Loan Near Me In Delaware Possible?
Author: vikram kumar

15. Tips To Find The Right Usda Home Loans Connecticut
Author: vikram kumar

Login To Account
Login Email:
Password:
Forgot Password?
New User?
Sign Up Newsletter
Email Address: