How are mutual funds (MFs) taxed?
- Harish Shah
Profits arising out of net asset value (NAV) growth of MF investment will be considered as capital gains. Taxation rates for gains arising from redemption depend on the type of the fund redeemed and the holding period. Funds that invest at least 65% in equity shares of domestic (Indian) companies are classified as “equity oriented” schemes. All regular domestic diversified equity or equity-oriented hybrid funds will fall into this category. Capital gains arising out of redemption are taxed at 15.45% if the holding period is less than one year (short-term gains). If the holding period is longer than a year (long-term gains), then the taxation is nil for such gains.
For all schemes that are not classified as “equity-oriented”, including all debt schemes, gold schemes, international equity schemes, fund-of-funds, and debt-oriented hybrid funds, the taxation would be at the marginal income-tax rate applicable for short-term gains. For long-term gains, the rate would be 10.3% without indexation and 20.6% with indexation.
I am 40 years old and want to invest Rs 80,000 per month for 5-10 years. Please suggest funds.
For your time frame, you can use a moderately risky portfolio that invests two-thirds in equity and one-third in debt. Invest half your money in diversified equity funds, while dividing the other half between equity-oriented balanced funds and debt funds. Equity-oriented balanced funds will have a debt component that will contribute about 8-10% of debt to your overall portfolio adding to the 25% from the pure debt funds.
For diversified equity funds, you can choose among large-cap funds such as Franklin India Bluechip and DSP BlackRock Top 100 and funds with mid-cap exposure such as UTI Equity and HDFC Top 200. Go with HDFC Balanced and Birla Sun Life ’95 for balanced funds. In the debt category, you can go for Birla Sun Life Dynamic Bond fund along with a short-term fund such as Canara Robeco Short Term fund.
I have Rs 20 lakh. We may need the money any time after 3-4 months. Where should I invest?
- Gopal Kumar
For investments for a year or less, go with short-term debt funds. If you are in the top tax bracket, you can optimize your post-tax returns by opting for a dividend or dividend reinvestment plan. Here, appreciation of your investment accrues in the form of dividends (tax-free in the hands of the investor) and not NAV, which results in capital gains that are taxed at your marginal rate when the holding period is less than a year. Dividends reinvested also incur tax, but the rate of this tax (dividend distribution tax) is 13.5%, which would be less than your marginal rate. Canara Robeco Short Term and UTI Short Term Income funds are good.
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Srikanth Meenakshi is the founder and director of FundsIndia.com.