• For conservative investors, fixed deposits and debt mutual funds are among the most prominent debt investments.
For conservative investors, fixed deposits and debt mutual funds are among the most prominent debt investments. Debt funds are the next least risky option after FDs, but debt mutual funds take the lead when it comes to liquidity and regular investment options. Taxpayers be aware that while short-term capital gains on debt fund investments held for less than three years are subject to your tax slab rate, long-term capital gains on debt fund investments held for more than three years are subject to 20% tax rate. Indexation benefits, and benefits on Fixed Deposit returns are subject to your tax slab rates. While financial advisors claim that if investors are in the higher income tax bracket, debt funds are more tax-efficient than fixed deposits for them, let's find out how.
Based on an interview with CA Manish P Hinger, Founder, Fintoo, the spokesperson said, "Both bank fixed deposits and debt mutual funds are suitable for low to moderate risk appetite investors, but make a wise choice between the two considering their liquidity." The choice must be made. Risk, return and taxation. From a taxation point of view, debt mutual funds are more tax efficient as compared to bank fixed deposits. This is because the gains from debt mutual funds are taxed differently. Interest income earned from bank fixed deposits is taxed as per the individual's tax slab, while income from debt mutual funds is taxed on the basis of short term and long term capital gains.If debt mutual fund is held for more than 36 months Such long-term capital gain, if redeemed after holding it, is taxed at 20% with indexation benefit. On the other hand, short-term capital gain is taxed at the individual's tax slab, if he is 36 years old. kept for less than a month.
“For example, if you invest ₹1,00,000 in a debt mutual fund for 4 years, which has generated a CAGR of 8%, your investment value after 4 years would be approximately ₹1,36,000 and your profit would be ₹ 36,000. After considering the benefit of indexation i.e. inflation adjustment, the tax liability on selling debt mutual funds will be ₹3,566. In case of investment in Fixed Deposit of the same amount, for the same return and same tenure, the investor would have to pay tax of ₹10,800 considering he is in the 30% tax bracket. Having said that, the tax impact on bank FDs and debt mutual funds will be similar in case of investments held for less than 3 years. However, considering the long-term capital gains taxation and the tax bracket of an individual, debt mutual funds are a better option for investors in the higher tax bracket," said CA Manish P Hinger.
"Please note that on the basis of risk and return comparison banks are considered almost risk free as your investment is insured up to ₹5 lakh and returns are also pre-determined whereas debt mutual fund returns are market linked and is subject to interest rate risk, default risk and inflation risk," said CA Manish P Hinger.
Based on an interview with Nitin Rao, head of products and offerings, Epsilon Money Mart, the spokesperson said, "When it comes to taxation on fixed deposits and debt mutual funds, the latter have the advantage over a period of 3 years and above." Interest earned from fixed deposits is taxed as per the income slab rate of the investors, however, maturity proceeds of bank FDs are not taxed. If the interest amount paid on FD to a resident individual exceeds Rs. 40,000 (Rs.50,000 in case of senior citizen). In case of debt mutual funds, taxation depends on the holding period, for holding period less than 3 years, FD and debt fund taxation There is no difference between how it works. But if you redeem your debt mutual funds after 3 years, the gains/gains are taxed at 20% after indexation. Indexation is the balance of your capital gains against the tax deduction. To protect is the process of adjusting the value of investments to align with inflation."
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