Liquid/ultra short term fund and short term capital gain tax

For debt mutual funds, short term capital gain tax is applied if the fund is redeemed within 3 years and it is equal to investor's income tax slab. Purpose of liquid fund is not to invest for more than 3 years to avoid short term capital gain tax, but intention of that fund is to invest for shorter time when one has surplus funds.

I have seen many investment advisers advise to pick debt mutual funds especially liquid/ultra short term fund rather than fixed deposits, especially for those who come under the 30% income tax slab.

Then should I conclude that liquid funds are of no use for those who are under the 30% income tax slab? Because they have to pay sort term capital gain tax of 30% which is same as TDS* of FD. If yes then who should opt for liquid funds?

* TDS is applied if interest exceeds Rs 10,000

 

• The STCG (Short Term Capital Gains) tax rate on equity funds is 15%.
• The STCG tax rate on Non-Equity funds (or) Debt funds is as per the investor’s income tax slab rate.
• The LTCG (Long Term Capital Gains)tax rate on equity funds is NIL.
• The LTCG tax rate on non-equity funds is 20% (with Indexation benefit)

This is for FY 2015 - 2016

If you're worried about small change (STCG taxes) you shouldn't be looking at non-equity funds.

 

Yeah I know the rates. But I want to know who should opt for debt funds based on investor's income tax slab.

 

The ones who "need" to opt for debt funds know it.

Are you coding it in some app or something? What's the point? Academic? You'd get better answers from the investment advisers you heard it from.

And do you mean "under" like in the 30% bracket or those in the lower brackets?

Most of these are liquidity driven decisions, not returns driven.

 

From tax POV short term MFs and FDs are at same rate of tax. But disadvantage of FD is lock in of funds. Advantage is assured return. The vice versa is advantage/ disadvantage of debt MF

So if you are sure of want of funds in < 1 year, FD is not option only MF is option. For longer period you have choice based on ROR

 

@BombayBoy I am not creating any app. I just wanted to know the purpose of debt MFs and rationales to pick debt MFs over FD based on tax slab. You gave one rationale that's these are liquidity driven decisions, not returns driven.

@Srouta Mukherjee cleared my point.

 

@BombayBoy thought you were asking highly complicated point !!

 

TDS deducted on FD is 10%. But if donot submit copy of PAN Card, 20% TDS is deducted. This is irrespective of the Tax slab.

 

Does it mean if one submitted PAN then applicable TDS would be 10% and interest income would attract deduction as per individual's IT slab?

 

A bank will in any case not accept your FD which will earn an interest in excess of ₹10000 if you don't have a PAN.

Form 15G will help if you're below 60 and income less than taxable limits (₹250000) as per the prevailing income tax slabs. Form 15H is for senior citizens.

Conditions you must fulfill to submit Form 15G:

1. You are an individual or HUF
2. You must be a Resident Indian
3. You should be less than 60 years old
4. Tax calculated on your Total Income is nil
5. The total interest income for the year is less than the minimum exemption limit of that year, which is Rs 2,50,000 for financial year 2015-16.

Conditions you must fulfill to submit Form 15H:

1. You are an individual
2. You must be a Resident Indian
3. You are 60 years old or will be 60 years old during the year for which you are submitting the form
4. Tax calculated on your Total Income is nil

Any interest income will be added to your total income and taxed at applicable rates.

 

I would like to add few more important points to what BB said.

Regarding "Conditions you must fulfill to submit Form 15G:" All the criteria 1 to 5 are very important and should be met simultaneously. You cannot file 15G declaration even if one of the five criteria is not met. It is also possible that, in the middle of the year, you may find that one of the criteria is not being met. Suppose your income estimate changes in the middle of the year and you have already submitted the declaration form. What you do ? You can submit a written request to the bank (or financial institution as the case may be) for deducting TDS on all future interest payments. But, suppose your Bank cannot accept your request (owing to technical problems as in some banks, the TDS is deducted by the Bank software automatically and they cannot reverse it or the TDS has already been credited to the Government), you will have to pay the additional tax by way of additional tax to ensure your compliance with the tax laws.

You have to take care while file the 15G or 15H declaration. A false or wrong declaration in Form 15G or 15H attracts penalty and prosecution. Prosecution includes imprisonment which may range fron three months to two years alongwith fine. The penalty, prosecution and fine depends on the amount of TDS deduction avoided by the declaration. Ignorance about the TDS rules cannot save you.

 

Yes

 

While I was working at Axis Bank, this was a blatant practice of booking FDs for a client across branches in the region just to avoid taxes. Finally the taxman caught up. Even back then, I think Kotak Bank was compliant by clubbing interest at customer level instead of account level.

In reality, you'll find that money laundering and tax evasion is prevalent as a normal business practice.

 

Now, In the Banks having core banking, the tds is deducted centrally. Even if you may have bought FD in a Bank branch in the remotest part of the country, the Bank head office will be aware of your FD account. Secondly, it is your legal duty to ensure that the correct TDS has been deducted on your FD interest. If it has not been done, for whatever reason, you have to pay the tax yourself to ensure your compliance with the TDS laws.

So you may be having FDs in 100 different branches of the same bank or single branch of 100 different banks. You have to ensure TDS compliance or the taxman will punish you.