DBS is correct. No LCTG on equity based MF (LCTG is 1 year).
Even for debt based MF, effectively tax rate is very low. For debt MF, LCTG ( holding period greater than 3 years), its either flat 10% or 20% with indexation. Most debt fund returns are in the range of 8-9%. As per govt published CPI figures, indexation is almost 7-8%. That will reduce your gain to the tune of 1-2%. So effective rate of taxation is almost .5%.
If you sell before 3 years, then its taxed at your normal income level.
All banks are lobbying govt to plug this loophole as slowly people are preferring debt funds vs FD which taxes at your normal rate inspite of holding period. I think eventually govt will bring it to parity with FD. They are already buckled prev year to make debt funds less attractive by increasing LCTG to 3 years instead of 1.
MF income tax free in India??
MF income tax free in India??
ashishck;632902DBS is correct. No LCTG on equity based MF (LCTG is 1 year).
Even for debt based MF, effectively tax rate is very low. For debt MF, LCTG ( holding period greater than 3 years), its either flat 10% or 20% with indexation. Most debt fund returns are in the range of 8-9%. As per govt published CPI figures, indexation is almost 7-8%. That will reduce your gain to the tune of 1-2%. So effective rate of taxation is almost .5%.
If you sell before 3 years, then its taxed at your normal income level.
All banks are lobbying govt to plug this loophole as slowly people are preferring debt funds vs FD which taxes at your normal rate inspite of holding period. I think eventually govt will bring it to parity with FD. They are already buckled prev year to make debt funds less attractive by increasing LCTG to 3 years instead of 1.
There may be another option.
Till last year, I was investing in arbitrage/liquid fund with dividend option. Dividends are tax free.
I had to hold large amount of cash for a particular transaction. For short term less than 1 year, this beat the FDs especially as I could not be certain when I would need the cash. The risk of some erosion of capital was there but together with dividend I think I came out ahead. I have not calculated the return but MF sites claim 7 to 9%+ annualised returns.
MF income tax free in India??
Nice discussion
Just to add to db's's point. Arbitrage fund are considered equity, hence dividends are tax free (both at the MF level and in your hands). Actually they are relatively very safe as for every opportunity, they make two opposing transaction to take advantage of arbitrage in current and future pricing. It doesn't matter which way and by how much the market, or that specific opportunity moves. The gain is locked.
But they are not considered liquid fund. Liquid funds are type of debt fund. And one must exercise caution when taking dividend option. Although dividends are tax free in investor's hand, the fund house has to pay tax at arnd 25% before distributing it ( its even more if its liquid fund).
If you take the dividend option of liquid or some other debt fund, the dividend investor will get in the year will always be 4-5% of the investment amount(since fund house has to pay tax on that before giving it to you), even though its tax free on your hands.
In case of growth option, the NAV keeps on increasing linearly @rate of 8-9%. When you redeem it, you will get the full growth of 8-9% and then pay tax on it, which can be minuscle if held for long term and exercising indexation option.
In dividend option, no matter how long you hold, return will always be arnd 5% due to fund house paying tax before every distribution.
Just to add to db's's point. Arbitrage fund are considered equity, hence dividends are tax free (both at the MF level and in your hands). Actually they are relatively very safe as for every opportunity, they make two opposing transaction to take advantage of arbitrage in current and future pricing. It doesn't matter which way and by how much the market, or that specific opportunity moves. The gain is locked.
But they are not considered liquid fund. Liquid funds are type of debt fund. And one must exercise caution when taking dividend option. Although dividends are tax free in investor's hand, the fund house has to pay tax at arnd 25% before distributing it ( its even more if its liquid fund).
If you take the dividend option of liquid or some other debt fund, the dividend investor will get in the year will always be 4-5% of the investment amount(since fund house has to pay tax on that before giving it to you), even though its tax free on your hands.
In case of growth option, the NAV keeps on increasing linearly @rate of 8-9%. When you redeem it, you will get the full growth of 8-9% and then pay tax on it, which can be minuscle if held for long term and exercising indexation option.
In dividend option, no matter how long you hold, return will always be arnd 5% due to fund house paying tax before every distribution.
MF income tax free in India??
No more tax-free now. You all surely had enjoyed tax-free (long-term) season.