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| Debt Mutual Funds and Budget 2014 Posted: 30 Jul 2014 06:02 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
The increase in the tax exemption limit from ₹ 2 lakh to ₹ 2.5 lakh, the savings that can be done under Section 80C has been increased by ₹ 50,000 per annum and the deduction available for interest repayment towards home loans for self- occupied property has been increased to ₹ 2 lakh. But, there was a sore spot amid all the good news.
It was the change in the long- term capital gains tax and the tenure for qualifying for long- term capital gains for non- equity mutual funds. Long term capital gains tax used to be 10 per cent without indexation or 20 per cent with indexation, whichever was lower.
Now, the 10 per cent has become 20 per cent, effectively leaving only 20 per cent with indexation as the option. The other blow was the increase in duration from 12 to 36 months for being considered long- term.
Giving some respite to investors, the Finance Minister clarified, on Friday, that the higher capital gains tax on debt funds will not apply for redemptions made between April 1 and July 10. However, if you redeem after this date, the new tax rates will apply and so will the new definition of long- term.
These changes have lots of implications when we plan finances. Let us divide the tenures into three segments and analyse the impact. But do they make all debt funds bad options? Not really. Let us look at their impact by dividing the investment tenures into three segments.
One year or less: For a period of less than 12 months, investors can look at liquid funds or ultra short- term funds. These are suitable from the point- ofview of liquidity requirements and short- term provisioning. The attraction in these funds is that these can be cashed out when required and till that time they earn good returns. These funds might not have exit loads at all or may have exit loads for a short period of time, say a week to a month.
Additionally, these funds have given about nine per cent or more annual returns, in the past year.
Taxation in the less than one year period was always at one's tax slab rate. That has not changed after the Budget. The other option for liquidity/ short- term provisioning is keeping money in savings bank account. But that offers very low returns –typically four per cent pre- tax. Some banks give up to six per cent pre- tax, provided you maintain a certain minimum balance in the account. In most cases it is ₹ 1 lakh and above.
Another option is to invest in short- term fixed deposits ( FDs). Their returns are not very high – seven to eight per cent. Beside, they have a fixed tenure. If you want to withdraw before the end of the tenure, you will have to pay a penalty. This could mean lesser yield. Hence, for one year or less tenures, liquid funds/ ultra short- term funds can be continued.
One to three years : The problems arise in this period. Before the budget, debt funds used to enjoy the longterm capital gains tax treatment here.
Now, the tax treatment is as income. There is parity between FDs and debt funds in this tenure. Hence, in this tenure, debt funds are not hands down favourites.
But hold on, there are reasons to consider debt funds even for this tenure. Debt funds were being used to provide for goals/ expenses coming up in the near future. Many times, the timing of the expense is not clear. Hence, bet as compared to one that has a fixed tenure like a FD. It can potentially offer somewhat better returns than an FD, where on premature withdrawal, the yield can be lower.
FDs would be suitable for those who want fixed returns. FDs will work well if the goal/ provision is fixed and there is no possibility of a change there. However, if the goals get postponed, the FDs will mature and lie in the savings account, offering rather measly returns. This time period is a problem if we want to plan efficiently. We need to live with this uncertainty. Three years or more : Investments done for this period are generally for the long term, to meet goals/ funding requirements. In this tenure, offered along with the
home loan: Many banks today have an overdraft account ( OD) attached to the home loan, where one can deposit the excess money one may have. For whatever money lies there, in the one to three year the problem posed The other point to note is since the dividend distribution tax is at 28 per cent plus, it will not be suitable for those in the 0, 10 and 20 per cent tax slabs, as they would be effectively paying 28 per cent plus tax, when actually they are in the lower slabs. For such people, it would be better if they are in the growth option itself. Dividend option will, hence, be beneficial to those in the 30 per cent or higher tax brackets only.
Though there has been some turbulence in the debt fund space, it can be managed. The taxation in the one to three- year period has gone up and we need to live with it.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
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| Posted: 30 Jul 2014 12:50 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
Paying tax on capital gains
Capital gains accrue when an investor sells an asset for profit. The income tax laws define capital assets and mandate that investors pay the applicable tax on short or long-term gains. The holding period for the capital asset is used to determine the classification. The investor has to account for all such gains in a given financial year and pay the applicable tax before filing his income tax return.
Liability
Capital gains tax is payable on the sale of a capital asset, depending on the tax rate and minimum holding period for the asset. If the sale results in gain, there is a tax liability.
Multiple sales
All transactions in a financial year have to be taken into account to ascertain tax liability. If there are multiple transactions, the first-in, first-out rule is applied: what was acquired first is assumed to be sold first.
Payment
In case of individuals who have to get their accounts audited for tax purposes, any applicable tax on capital gains has to be paid as part of advance taxes. In other cases, it is paid as a self-assessment tax, before the filing of income tax return.
Setting off losses
Capital losses can be set off against gains if the investor has filed the returns on time. Delayed filing means he can't avail of the benefit.
STT
In cases where the securities transaction tax (STT) has been paid, the tax rate is nil or low. Investors should keep the proof of STT payment.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
Leave a missed Call on 94 8300 8300
Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com
--------------------------------------------- Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund Application Forms ---------------------------------------------
Best Performing Mutual Funds
B. Large and Midcap Funds Invest Online
C. Mid and SmallCap Funds Invest Online
D. Small and MicroCap Funds Invest Online
E. Sector Funds Invest Online
F. Tax Saver Mutual Funds Invest Online 1. ICICI Prudential Tax Plan 2. HDFC Taxsaver
G. Gold Mutual Funds Invest Online
H. International funds Invest Online 1. Birla Sun Life International Equity Plan A 2. DSP BlackRock US Flexible Equity 3. FT India Feeder Franklin US Opportunities 4. ICICI Prudential US Bluechip Equity 5. Motilal Oswal MOSt Shares NASDAQ-100 ETF | |||||||
| Mutual Fund FMPs with Zero Tax Posted: 29 Jul 2014 10:11 PM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
Mutual Fund FMPs with Zero Tax
Inflation reduces tax liability on debt fund gains from investments of over 3 years to just 0.5%Experts are of the view that FMPs coming up for maturity can be rolled over if an investor does not have any cash requirements in the near future
Investors in short-term debt funds may be ruing the changes in tax rules but long-term investors have plenty to smile about.
Till now, gains from investments in debt funds were treated as long term capital gains if the investment was held for more than a year.
But fund houses have now replaced them with three-year FMPs.
Though illiquid, these schemes are more tax-efficient than fixed deposits. The interest on fixed deposits is fully taxable. It is added to the income of the investor and taxed as normal income. For those with a taxable income of more than ` . 10 lakh a year, the tax is 30%. In stark comparison, the effective tax on gains from a three-year FMP is 0.56%. The budget killed one-two year FMPs but three-year FMPs still have a significant tax advantage over fixed deposits.
Though FMPs can give higher post-tax returns, they don't score very well on the liquidity front.
But this exit route is only a theoretical possibility. In reality, there are hardly any FMPs traded on the exchanges. According to Value Research, in 2013, only eight of the 700 FMPs available in the market were traded on the BSE on 20 days. This year has been better but the volumes rarely cross a few hundred FMP transactions a day . The scanty trading is not the only problem. The price offered by buyers is usually lower than the NAV of the scheme. If you need the money urgently , you will have to take a loss and sell at a discount. So, be ready to hold for the full term when you invest in an FMP. Several fund houses such as HDFC Mutual Fund, ICICI Prudential Mutual Fund, Reliance Mutual Fund, IDFC Mutual Fund, among others, are rolling over their one-year, one-day fixed maturity plans (FMPs) that are coming up for maturity. It will help investors ward off the increased tax proposed in the Budget. The finance minister has proposed to hike tax on long term capital gains in all non-equity schemes to 20% from 10% and the holding period to 36 months from 12 months in the Budget. HDFC Mutual Fund has rolled over its HDFC FMP Series 26, maturing in July 2014, by 763 days to August 2016. Other mutual funds are likely to follow suit.
Experts ask investors to consider rolling over these FMPs if they don't have any cash requirement in the next two years, as they feel interest rates are headed lower in the coming months. With the State Bank of India cutting interest rates on deposits by 50 basis points across maturities, it is a matter of time before interest rates head down. It makes sense for investors to roll over their FMPs and lock-in their funds at these high rates
If the FMP was meant to meet a specific goal, which is less than two years away, do not rollover. FMPs Still Score on Taxation
Investment experts say individuals who have opted for the growth option can consider the rollover of their FMPs. If you have invested in the dividend payout option, it may not make much sense to rollover. Since a dividend distribution tax (DDT) has already been paid, there will be no further tax benefits. Investors who do not have any liquidity requirements could consider rolling over their FMPs, as they will get the benefit of indexation, thereby reducing their tax liability. Triple indexation benefit may even reduce the tax liability to zero.
If you rollover your FMP beyond three years, your income will be subject to long-term capital gains tax at 20% or with indexation, whichever is lower. By using the indexation method to calculate tax, you shall be eligible for triple indexation benefits. Using this method, your tax liability may be negligible or even nil.
However, experts say investors must keep in mind their cash flow needs and the purpose for which the investment was made in the FMP before taking a final decision.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
Leave a missed Call on 94 8300 8300
Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com
--------------------------------------------- Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund Application Forms ---------------------------------------------
Best Performing Mutual Funds
B. Large and Midcap Funds Invest Online
C. Mid and SmallCap Funds Invest Online
D. Small and MicroCap Funds Invest Online
E. Sector Funds Invest Online
F. Tax Saver Mutual Funds Invest Online 1. ICICI Prudential Tax Plan 2. HDFC Taxsaver
G. Gold Mutual Funds Invest Online
H. International funds Invest Online 1. Birla Sun Life International Equity Plan A 2. DSP BlackRock US Flexible Equity 3. FT India Feeder Franklin US Opportunities 4. ICICI Prudential US Bluechip Equity 5. Motilal Oswal MOSt Shares NASDAQ-100 ETF |
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