The Mutual Fund Show: What Should Debt Fund Investors Do As Yields Rise?

MANTRI: Yes, there a couple of things they should know and they should be aware of. One is that, with the taxation part, they need to be very clear. First, they need to figure out whether the scheme in which they are investing is a debt-oriented scheme or an equity-oriented scheme. It is very important and it is very important to know that equity-oriented schemes are a scheme that the underlying fund only invests in Indian companies only. So, what does it mean that all funds of funds are not equity schemes from the taxation perspective? They may be equity schemes from the risk perspective, but they are not equity schemes from the taxation perspective. The first thing to examine that is, whether the underlying scheme is debt-oriented or equity oriented. Once you do that then figure out whether your investment is short term or long term. In equity, short term is below 12 months and long term is above 12 months. In a fixed income side, below 36 months it’s short term, and above 36 months is long term. So, keep the taxation in mind and also the keep the exchange rate fluctuation in mind when you’re looking at investing as an NRI into the Indian mutual fund industry. If you are owning equity or an equity-oriented fund, then tax rate below 12 months is 15% plus surcharge, which depends on what your taxable income in India is. If the taxable income is below Rs 50 lakh, then no surcharge. If it’s Rs 50 lakh to Rs 1 crore, then various slabs are available. Long-term capital gains tax on equity oriented mutual funds, above 12 months is 10% plus surcharge plus 4% cess. So, invariably what happens is, that the fund house generally takes the long-term capital gain tax, the tax is just below 12%. So, just keep that in mind when you’re investing in the equity-oriented mutual funds.

But when you’re looking at investing in non-equity-oriented mutual funds, keep in mind that anything below 36 months, it is a marginal tax. It means that whatever your taxable income is in that financial year in India, your mutual fund gains on the fixed income side will keep added there and whatever the tax levy falls in, there is a tax applicable to you but mutual fund invariably will deduct 30% tax on your short-term capital gains and deposit with the exchequer. You as an investor can claim it if your tax outgo is lower. When you look at long-term capital gains on the fixed income side which is above 36 months, there are two categories that one needs to keep in mind. Listed debt funds and unlisted debt funds. What are the listed debt funds? FMPs, capital protection-oriented funds and most closed ended fund except ELSS are listed. So, for them, the taxation is 20% plus indexation. Unlisted means, all open-ended debt funds are unlisted and in those categories your tax liability after three years is just 10% on the capital gains and then you have to pay the surcharge or cess depending on the taxable income in India. So, it is a very simple and a straightforward taxation. What is applicable to most Indian investors is applicable to NRIs. They just need to be mindful of the foreign exchange fluctuations when they invest in the Indian markets.

A very important factor that one needs to keep in mind is that, when a NRI invests in India, they take the benefit of foreign exchange fluctuations in their taxations, but it is a too complex subject to explain on your TV show. If any of the viewers are interested, they can DM me on Twitter or they can write it in the YouTube comments.

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