Look at taxation of dividends when choosing debt funds

Only those from equity funds are truly tax-exempt since they do not suffer dividend distribution tax


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One mutual fund agent advised me to invest for superannuation benefits in mutual funds because monthly or yearly dividends received are not taxable, whereas interest received on bank fixed deposit are taxable if it exceeds Rs.10,000 per year. Which income tax guidelines should I consider here?

—Kuntal Mitra

There are quite a few queries embedded in your question. Firstly, about taxation of bank deposits.

Please note that the Rs.10,000 exemption from taxes applies only to savings bank interest accumulated in a year, and not to fixed deposit interest. In the case of fixed deposits, the entire interest amount earned in a year is taxable at your marginal income tax rate.

Second comes taxation of dividends from mutual funds.

It is true that dividends from funds are tax-exempt in the hand of an investor. However, only those from equity funds are truly tax-exempt since they do not suffer dividend distribution tax (DDT).

On the other hand dividends issued by low-risk debt funds are subject to a high level (close to 30%) of DDT. So it would not be proper to consider them as being non-taxed income. Therefore, choosing funds over deposits purely from a dividend taxation perspective may not be right.

In your case, it might still be a good option to consider mutual funds, for at least a part of your investments. You can have a balanced portfolio with some equity allocation (20-30%) as well and the remaining in debt funds.

Do remember to invest in the growth option of these schemes and, if you need regular income, you can always opt for systematic withdrawal plan (SWP) to set up a steady flow of money.

My systematic investment plan (SIP) of 60 months is towards its end. I have received a letter to renew the SIP with the options that I continue the SIP for the next 60 months or top up, or ‘default’ till 2032. I am confused between these. What happens if I don’t renew?

—Kabir Goswami

Looking at the options that you have been provided in the letter that you received, it is likely that you are talking about a variety of life insurance policy that requires monthly premium payment.

I say this since mutual funds do not consider the termination of an SIP as having to “default” and they definitely do not give a far-away date such as 2032 to hold off until.

If this is the case, and you are indeed talking about an insurance policy, please contact either the agent that sold you the policy for your options or the insurance company directly.

On the other hand, if you are indeed talking about a mutual fund SIP, then you need not worry.

If the tenure of your SIP is ending and you do not want to renew it, you do not have to. Your money will be safe and will stay invested until you choose to withdraw it.

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