Skip to main content

Bank FDs after Budget 2014

 

Bank FDs after Budget 2014

While the Budget bats for bank FDs, investors can still find ways to benefit from debt and gold funds

 

A tax benefit of ₹ 1,300- 3,000 a month isn't huge, but the Budget proposals on individual taxation came as a huge relief as the benefit came after many years in the form of increase in the basic exemption limit to ₹ 2.5 lakh (₹ 3 lakh for senior citizens); increase in the 80C and public provident fund limits to ₹ 1.5 lakh and in the higher home loan interest benefit of ₹ 2 lakh.

The middle class would also heave a huge sigh of relief after the Union revenue secretary's assurance on Saturday that there would be no retrospectively in the flat 20 per cent tax on debt mutual funds.

But the doubling of the tax and the higher holding tenure for getting long- term capital gains benefits would still remain a sore point.

Now, if the investor sells the units in less than 36 months, capital gains will be added to their income and taxed as in their tax bracket, much like bank fixed deposits (FDs). There isn't any clarity on the inflation indexation benefit that investors used to get in their investments in debt instruments.

It would be unfair on debt investors if the indexation benefit is taken away." But there are many others who suggest ways out of the tricky situation. Here's how.

Tenure critical for highest tax bracket

From the tax rate point of view, investors in the highest bracket will not lose if they stay invested for three years. For, at 20 per cent, debt funds are still better than the FD tax rate of 30 per cent. However, if they take out the money before three years, they will have to pay the tax at the same rate of 30 per cent. Earlier, they benefited from the 10 per cent without indexation and 20 per cent with indexation regime.

Rate of return key for middle tax bracket

For investors in the 20 per cent tax bracket, things will be trickier. Both FDs and debt funds will be taxed in the same way, both in the short and long term. Here, the rate of return will come into play. At present, State Bank of India offers nine per cent for FDs of one year and above, whereas debt MFs have returned eight to 11 per cent. Income funds and gilt funds have suffered in the past year, returning only two to six per cent, according to data from Value Research.

If retail investors in the medium tax bracket choose good schemes, they will earn higher returns. They could, in fact, look at hybrid debt funds, which invest a little over 65 per cent in debt and the rest in equities. While their tax treatment will be like debt funds, some of them are returning a good 15- 20 per cent or even more. Investors who put money in hybrid funds will give themselves the opportunity to negative the tax impact partially due to higher returns.

Lowest tax bracket should go for fixed deposits

Investors in the lowest tax bracket ( 10 per cent) should not show any interest in debt funds, especially if the intent is to invest for more 3 years, as long- term capital gains will be taxed at 20 percent. If they invest for less than 36 months, short term capital gains will be taxed at 10 percent, which is the same as in the case of fixed deposits. However, by investing in high yielding debt hybrid funds, they can get higher returns than traditional options like bank deposits and bonds.

How to still enjoy debt funds

If you are in the highest tax bracket but your spouse or family member is, say, a senior citizen getting the benefit of the higher basic exemption of ₹ 3 lakh, or ₹ 5 lakh if he/ she is over 80, and don't have any income, you could invest in their name to get tax benefits. The capital gains could even become tax- free if the amount is below their exemption limits.

Arbitrage funds emerge winners

This is one category likely to benefit from the new tax treatment. These, by their nature, are debt funds but they get the tax treatment of equity funds because they invest in equities.

Typically, if the stock price of Reliance Industries is ₹ 967 on the BSE exchange and ₹ 970 on the National Stock Exchange, the fund manager will buy the stock on BSE and sell on NSE. Similarly, if there is a price difference between the spot and futures market, again, the fund manager will take advantage of that. These funds do quite well in volatile market conditions.

Since the strategy implies buying and selling at the same time, these funds aren't risky but the returns are low at nine to 10 per cent –similar to returns from most debt schemes and bank deposits. The advantage is, there will be no tax if the investor exits after one year, as the long- term capital gains tax for equities is zero. On the other hand, if the investor exits before one year, there will be a short- term capital gains tax of 15 per cent.

If your policy is maturing after October 1, the insurer will deduct a tax at source (TDS) of two per cent from the proceeds of your life insurance policy for both unit- linked insurance plans and traditional plans. The taxation will be on the entire sum, including the sum allocated by way of bonus, provided the premium paid towards the policy is more than 10 per cent of the sum assured.

Currently, under Section 10( 10D) of the Income Tax ( I- T) Act, any sum received from a life insurer is not taxable if the premium payable is up to 10 per cent of the sum assured. Tax would be payable as on your applicable slab if the premium exceeded the 10 per cent amount. However, since there was no TDS, several assessees avoided the tax. This TDS will, however, not apply if the amount is less than ₹ 1 lakh. What this means is that if your sum assured is less than 10 times the annual premium, you will need to pay a tax on the maturity proceeds. But the death benefit in this case will continue to be tax free.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund
      2. Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...
Read more

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...
Read more

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...
Read more

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...
Read more

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now