Skip to main content

Direct Taxes Code (DTC) and its effect on Fixed Maturity Plans (FMPs)

As the Income Tax Act makes way with effect from April 1, 2012, for the Direct Taxes Code, investors should be careful of overlapping investments. Meaning, investments where the IT Act is applicable while making it, whereas it is the DTC that will apply at the time of maturity.

For example, take the currently popular Fixed Maturity Plans (FMPs) of mutual funds. The attraction of these schemes is the tax efficiency they offer over bank fixed deposits. Both bank FDs and FMPs offer a similar rate of return. While the interest on bank deposits is taxed at the normal rate, in the case of FMPs (over a year), the 10 per cent (20 per cent with indexation) capital gains tax rate applies. Consequently, on a post-tax basis, an FMP is much more advantageous.

However, there is a significant issue. If you were to invest in, say, any one year FMP available currently, the IT Act applies at the time of making the investment. However, at maturity (2012-13), the DTC would apply. And, under the DTC, the tax advantage an FMP has may not be available. Let's understand how and why.

Basically, long-term capital gains from equity shares and equity-oriented mutual funds continue to be tax-free under the DTC. However, the current system of long-term capital gain taxation of non-equity MFs (10 per cent without indexation or 20 per cent with indexation) has been discontinued under the DTC. Though indexation will apply, the resultant capital gain would be added to the other income of the taxpayer and be brought to tax at the slab rates applicable. (Note here that it is not indexation per se but only the special rate of 20 per cent after indexation that is discontinued – indexation itself continues to apply).

Also, under the DTC, there is a significant departure from the ITA with respect to the method of determining whether a non-equity asset is long-term or not. For instance, under the ITA, a financial asset has to be held for over a year to qualify as long-term. Such a holding period is calculated from the date of purchase to the date of sale. For example, if you invest in an FMP in, say, August 2011, it would qualify as a long-term asset with effect from August 2012. However, under the DTC, the asset has to be held for over one year from the end of the financial year in which it was acquired. So, taking the same example, the FMP will qualify as long-term under the DTC only if held for over one year. From March 31, 2012, it will be considered a long-term asset only if sold anytime from April 2013 onwards.

So, let's see what these provisions mean for a typical 370-day FMP on offer currently (say in August). First, since the maturity of this FMP will be in August 2012, it is the DTC provisions that would apply, not those of the IT Act. That being said, since an FMP is a nonequity asset, the current system of 10 per cent (20 per cent with indexation) will not apply and, instead, the income will be subjected to the marginal rate of tax. Even this one could have lived with, since at least the net income subjected to tax would be lower due to applicability of indexation. However, in the above example, for the FMP to qualify as a longterm asset (and, hence, be eligible for indexation), it needs to be held for over one year from the end of the financial year in which it is purchased. That is, it needs to be held till April 2013. However, the maturity of the FMP will be in August 2012 and, hence, indexation will also not be applicable. Consequently, the income from such an FMP will be taxable just like interest from a bank deposit is – to be added to your other income and taxed at slab rates. The net effect would be that, given a similar rate of interest, there would be no difference whatsoever in the posttax return from a bank deposit and an FMP!

SUMMARY

The DTC is just round the corner. It is time various stakeholders take cognizance of this and tweak their offers in a way that would be optimal for the consumer. For example, the FMP tenure could have been so adjusted that every investor would end up qualifying for indexation benefits. Many may have already invested, not knowing (and not being warned) that at the time of maturity, the tax efficiency one has been used to all these years will not be available.

Investors, on their part, would do well to appreciate that this dual law applicability at the time of entry and exit is there for not only mutual fund schemes but also a host of other investments such as insurance plans, bonds and even to payments that earn tax deductions such as home loan instalments and tuition fees. Therefore, before committing funds for the long term, take care that the investments are tax-efficient and in conformity with the provisions of the DTC, rather than the current IT Act.
 

Popular posts from this blog

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.
Read more

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli
Read more

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis
Read more

Mutual Fund Review: IDFC Premier Equity Fund

  IDFC Premier Equity Fund, which falls under the presumed high risk group of mid- and small-cap schemes, can rely on astute and timely equity picks. These make it less vulnerable to fluctuations compared with others in the category   IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes.    While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows. Thus, while an investor can always take the systematic investment plan ( SIP ) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for l
Read more

IDFC Premier Equity Fund dividend

  IDFC Mutual Fund   has announced dividend under the dividend option of   IDFC Premier Equity Fund Direct-D . The quantum of dividend shall be   R 4.3464 per unit.   The record date has been fixed as May 06, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot]
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