Go For Systematic Withdrawals From Debt Funds
Anutosh Bose, chief operating officer, LIC Nomura Mutual Fund, recommends systematic withdrawal plans (SWPs) for those seeking to reduce their tax liability on redemption from debt mutual funds.
He says after budget 2014-15 announced a flat 20 per cent tax on long term capital gains from non equity funds, many planned to invest in fixed deposits. He also says ” instead investing in bond funds or short-term funds and using SWPs can be helpful and tax friendly. Fixed maturity plans(FMPs) are unattractive b comparison, as these have a lock-in, which will only rise with the new tax regime. Bonds and short term funds provide FMP-like returns, along with the flexibility of partial and intermittent withdrawal.”
Those who do not need the entire money at a go, SWPs are useful. Bose said if the investor needs a smaller amount in fixed intervals, SWP lets one withdrawal a specific amount and pay only on the earnings or the gains portion of the withdrawn amount.
You will earn 10 per cent a year if you invest Rs 50 lakh fixed deposit. After a year you will earn Rs 5 lakh of interest income. The entire interest income will be taxable at the slab rate if you redeem from the deposit. In the highest tax bracket, you will pay tax of Rs 1.5 lakh.
The Director of H&R Block Vaibhav Sankla said the tax will be applicable only on the capital gains part of the redeemed amount.Say you buy each unit for Re.1(50,00,000 units ) and plan to withdraw systematically at the end of each year. A year later , if the price of each unit is Rs. 1.1 and you sell 455,000 units the short term capital gains will be only Rs.. 45,500 and this will be taxed at the slab rate. Sankla also say in the highest tax bracket, the tax will amount to Rs 13,650.
According to the new rules the long term capital gains tax will be 20 per cent post indexation after three years. However after taking indexation into consideration the long term gains will be close ti nil, as the cost inflation index is rising at about ten per cent and returns on debt funds are eight-nine per cent. So the indexed cost of a unit worth Re 1 should become Rs.1.3 after three years. The actual price of the units after three years will be Rs. 1.24, a small loss. Sankla said sometimes the index value ad returns are close and long-term capital gains could be zero.