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Debt Funds offer Higher Tax Free Returns than BANK FDS

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In bank FDs, interest is taxable at the marginal rate of income and for high net worth individuals this tax is as high as 30.90%. On the other hand, returns on debt funds beyond one year are treated as capital gains wherein the tax rate is 10% without indexation or 20% with indexation, whichever is lower.


In short, an investment in a debt mutual fund beyond one year will be taxed at 10% or lower. There is also a provision to set off previous losses, if any, and reduce tax liability further. Debt funds also offer you a powerful feature of tax deferment, which means that tax liability will arise only when one sells his investment. This allows one to compound the returns on investment without paying taxes in between.


Debt funds are available over various maturities, ranging from very short to long term, which helps one to map retirement goals and plan cash flows.


In the table here, we've taken for case study Arun Kumar (name changed), aged 60 years, who has a corpus of Rs 75 lakh and a monthly requirement of Rs 35,000 as pension. Let's assume that at any given point of time, he needs to keep Rs 5 lakh as contingency funds to meet medical emergencies.
The ideal asset allocation is shown in the table.


In the given illustration, one should opt for the growth option and take a systematic withdrawal plan (SWP) of Rs 35,000 per month.


In the second year, one can start an SWP of Rs 37,000 from short term or accrual funds to meet monthly expenditure. Care has to be taken to match cash flows with the maturity of the funds held.


When done correctly, such a strategy will prove to be extremely tax efficient for an investor.


As this is just an illustration, investors are advised to consult their financial advisor to create a proper financial plan to ensure safe and enjoyable retirement life.

Happy Investing!!

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  1. ICICI Prudential Tax PlanInvest Online
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  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) FundInvest Online
  7. SBI Magnum Tax Gain Scheme 1993Invest Online
  8. Sundaram Tax SaverInvest Online
  9. Edelweiss ELSS Invest Online

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