I have received ₹ 10 lakh from a relative who owed me money. He has given the money back considering my daughter’s wedding is approaching. The wedding will happen in February 2019 and I will need this money in January. Can you suggest a few schemes to park this ₹ 10 lakh and another ₹ 5 lakh in my bank?
You are looking for an investment option to park your money for a period of six months. For such a short period, the only prudent option to consider would be liquid funds which are least risky of the debt funds in the market. Funds such as Aditya Birla Sunlife Liquid fund or ICICI Prudential liquid fund would be good options to park your money for a short while and take it out with quick (one-day) liquidity and no penalties or loads.
If I invest every month in mutual funds, and redeem ₹ 1 lakh every year, starting from the 5th year, how will long-term capital gains (LTCG) tax apply?
There are three parts to mutual fund taxation. First is the type of mutual fund that is under consideration, with equity-oriented funds getting a different tax treatment compared to all other types of funds. Second is the period of holding—for equity-oriented funds, the period that is considered as “long term" is one year and for all other types of funds, it is three years. These two factors will determine the rate of tax that will apply to every redemption transaction. The third factor will determine the gain amount on which this tax rate will apply. And that factor is how to calculate the gain—how to determine the cost value of the redeemed units which will be reduced from the redemption amount to yield total gains. The range of combinations across these three factors can get quite complicated, so for now, I’ll illustrate one of the more likely scenarios to let you know how taxation works in such situations.
Let’s assume that you are investing your SIP in an equity-oriented fund and that you are investing ₹ 5,000 a month. In this case, the rate of taxation that will apply will be 10% for long-term capital gains. Since you will be redeeming from the fifth year, by which time you would have invested ₹ 2.4 lakh through your SIP of which ₹ 1.8 lakh would have been invested a year ago, it is highly likely that the ₹ 1 lakh that you withdraw would be a long-term transaction. In any redemption transaction, if there are more units in the investment than are required for withdrawal, the earliest units invested would be considered as having been redeemed (this is the first-in-first-out or FIFO principle). So, in this case, the earliest units, until the value realizes to ₹ 1 lakh in your case, would be considered redeemed. To calculate the actual capital gains that will be subject to 10% tax, you would have to average the cost of acquisition of these units (across multiple SIP instalments) and subtract that from the redemption amount. From this amount, you would need to subtract ₹ 1 lakh that the IT law exempts from taxation for capital gains. The remaining amount will be subject to LTCG rate of 10% in this scenario.
As you can see, there are a handful of assumptions in my illustration above. You could be investing in a combination of debt and equity funds, you could be investing a lower amount and so on. So, you would need to apply the general principles of what constitutes LTCG for what type of investment, and how to calculate gains to arrive at the tax that would specifically apply for your investment.
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Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com. Queries and views at firstname.lastname@example.org