Is the surrender value on a pension fund from a mutual fund (MF) taxable?
Retirement or pension funds from MFs are nothing but tax-sheltered investment instruments that offer tax deductibility under section 80C of the Income-tax Act, 1961. The money accumulated in these funds are like in any other MF, and can be redeemed after the lock-in period (which differs between different funds) is completed. The concept of a surrender value does not apply here as in the case of insurance policies. These funds are redeemed just like any other mutual fund.
Regarding the tax treatment, it depends on what kind of MF you are invested in. If it is an equity-oriented mutual fund (a fund that invests at least 65% in the domestic equity market at any time), then your redemption amount will not be taxed. And if it is a debt-oriented retirement fund (sometimes called the conservative option), the profit accrued in the fund will be subject to taxation. However, in this case, the investor can take advantage of cost indexation whereby only the returns beyond a notional inflation rate would be taxed at a flat rate of 20%, bringing down the taxation burden significantly.
I’m 29 years old, single and a first-time MF investor. I have the following schemes in my portfolio : SBI Bluechip, Birla Sun Life Frontline Equity, ICICI Prudential Value Discovery, Franklin India Prima Plus, Mirae Asset Emerging Blue Chip, and HDFC Balanced. All of them are direct plans. My investment objective is to earn long-term returns. Do I need to change my portfolio for this?
For a first-time investor, you have picked some good funds. However, you have not indicated how much money you are going to be investing in each of these funds; that information is important to determine the overall risk profile of the portfolio. For now, let me assume that you are planning to invest equal sums of money (say Rs.2,000 each, totaling Rs.12,000 for the entire portfolio). In such a case, you are investing a third of your portfolio in large-cap funds, another third in diversified funds (large- and mid-cap funds), and the remaining split between a mid-cap fund, and an equity-oriented hybrid fund. This is an aggressive portfolio with more than 90% exposure to equity, and the remaining to debt. Given your age and long-term investment horizon, investing in such a portfolio is not a bad idea.
Coming to allocation, you could replace one large-cap fund with a mid-cap fund. Between the one large-cap fund and the two diversified funds, you will have more than adequate exposure to the large-cap segment. But a single mid-cap fund would be inadequate to provide you with the necessary coverage of the more widely spread mid-cap segment.
Hence, you may replace the SBI Bluechip Fund with a mid-cap fund from the same fund house in the form of SBI Emerging Businesses Fund.
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