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Thursday, February 25, 2016

Systematic Transfer Plan Strategy

 

Is Systematic Transfer Plan a good strategy?

If debt funds are sold before three years, the gains are treated as short-term gains and taxed according to the income tax slab applicable to the investor

parking money in a liquid fund and using a Systematic Transfer Plan (STP) to gradually invest in an equity fund is a good strategy. The idea behind this strategy is to earn a little extra from the investment in a liquid fund.
 
However, this method attracts short-term capital gains tax as every STP instalment is considered a redemption in the liquid fund. If debt funds are sold before three years, the gains are treated as short-term gains and taxed according to the income tax slab applicable to the investor. In your case, the short-term capital gains tax would be 30 per cent plus cess. You can bring down your tax liability marginally by opting for the dividend reinvestment option in the liquid fund. Under this option, the mutual fund distributes all gains as dividends and this results in zero or almost nil capital gains.
 
Dividends are tax-free for investors, but mutual funds pay a dividend distribution tax of 28.84 per cent on dividends declared. As you can see, you are not completely escaping the capital gains tax net by using this method. It is a convenient option that helps you to save a little on taxes.
 
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