ABOUT THE EXPERT

Jitendra Solanki

CFP & Founder, JS Financial Advisors

axation plays a key role in deciding what returns you will earn from your investment. For

an individual in highest tax slab the return of 9% drops down to around 6% if the returns are taxable at maximum marginal rate. Considering inflation of 6%, the money may not be growing at all.

Debt Mutual Funds have a differential tax treatment as compared to equity. While Dividends enjoy a tax free status in equity they are taxed in debt funds through Dividend Distribution Tax. Similarly, there is no tax on long term capital gains in equity while same is taxed in debt mutual funds. The tax rates also vary within various categories of this avenue. Hence, one needs to understand the taxations structure in debt mutual funds before making a decision to invest.

Let's analyze how investment in debt mutual funds will be taxed for FY 2012-2013.

Dividend: Dividend income is tax free in the hand of investors. However, the mutual fund company has to pay a dividend distribution tax (DDT) before distributing this income to its investors.

Tax rates for dividend income for FY 2012-2013

*5% surcharge Is applicable when total income exceed Rs 1 cr

Capital Gains: Gains from debt mutual funds schemes are treated as capital gains. If you have held your investment for less than a year then you will have to pay short term capital gains tax while any investment which is held for more than a year is treated as long term.

Following is the tax rates for long and short term capital gains:

Long Term Capital Gains

*5% surcharge is applicable when total income exceed Rs 1 cr

Short Term Capital Gains

*5% surcharge is applicable when total income exceed Rs 1 cr

Although NRIs have similar taxation rates as resident individual, they have to pay the tax during the redemption from mutual funds scheme in the form of TDS.

For NRIs

TDS on short term capital gains: 30.900%

TDS on long term capital gains: 20.600% (With benefit of indexation)

If the actual taxation is lower, NRIs can claim the refund through filing Income Tax Returns.

How to derive benefit from investing in debt funds?

Although debt mutual funds carry higher taxation rates, one needs to select options wisely to derive the tax efficiency from the investment. When you have a short term horizon i.e. less than a year, you invest in ultra-short term or short term debt funds. Any withdrawal before one year gets taxed at your income tax slab. If you opt for a dividend option your capital gains are minimized and you end up paying lower tax on your profits in the form of DDT. Similarly, for investments with more than a year horizon, indexation benefit helps in enhancing your post tax returns.

Traditional avenues like fixed deposits, post office time deposit or NSC although give high fixed rate of interest, they lose the benefit on post-tax returns as the income derived from these instruments is taxable at your income tax slab with no benefit of indexation in the long term. For individuals in highest tax slab, the post-tax returns are highly unattractive. Debt mutual funds with their tax efficient structure and various categories of schemes are a good option for meeting various needs.

Budget 2013- 10 measures that can impact you by Vidya Bala on February 28, 2013 in General, Mutual funds, Personal finance Are the budget proposals expected to boost economic growth? I dont think so, but that story can wait. For retail investors, the budget is a mixed bag. The finance minister has given some higher deduction on home loan interest, minor tax rebate on those in the lower tax bracket, tweaking of RGESS, reduction in securities transaction tax and the much expected inflation-indexed bonds. But he has also proposed to take some money away by way of surcharge on the super rich, higher dividend distribution tax for debt funds, change in computation of luxury home value for service tax purpose and so on.

No-Frills SB Account" "No-Frills SB ACCOUNT", is available primarily to low income group people of the society, downtrodden men and women, students, senior citizens, weaker sections of the society, financially and economically backward people, who are mainly residing in rural and semi urban centers of our country. The main idea behind the NO-FRILLS SB ACCOUNT is to reach out a sizable section of the population, who have been deterred and discouraged in availing Banking services for one reason or the other. Terms and Conditions a. SB account can be opened and operated with minimum balance of Rs.10/-. b. Nature and extent of transactions should be of encouraging saving habits nature. c. These accounts are free of service charges or any fees/levies. d. Account can be operated through withdrawal slip and cheque book facility is made available where ever the average balance is maintained at Rs.500/e. Relaxed KYC norms are also applicable. The main norms are: In case a person who wants to open an account is not able to produce documents, branches may open accounts for those persons as described above, subject to a] Introduction from another account holder who has been subjected to full KYC procedure. The introducer's account with the Bank should be at least six month old and should show satisfactory transactions. OR b] any other evidence as to the identity and address of the customer to the satisfaction of the Bank. Further, the customer should be made aware that if at any point of time, the Balances in all his/her accounts with the branch [taken together] exceeds rupees fifty thousand [Rs.50,000/-] or total credit in the accounts exceeds rupees one lakh[Rs.1,00,000/-], no further transactions will be permitted until the full KYC procedure is completed. A system of verifying place of Residence or the address given should be suitably put in place without inconveniencing the depositors. II. In respect of No frill account the Bank will undertake collection of outstation cheque without collecting any commission, but recovering out of pocket expenses. III. The nature and number of transactions in such accounts could be restricted, up to 30, per half Year. IV. The No Frill SB Account can be converted as ordinary SB account if it is requested by the customer after compiling full KYC NORMS, but existing SB account can not be converted into NO-FRILLS SB Account.

Here are 10 measures both on investments and spending that could have an impact on you: WHERE YOU GAIN

1. RGESS expanded The budget proposes to provide a fillip to the Rajiv Gandhi Equity Savings Scheme by tweaking the provisions of Section 80CCG, effective 1 April 2013. Investors with a total income of up to Rs 12 lakh (Rs 10 lakh currently) will henceforth be eligible for this scheme, provided they satisfy the criteria of new investor. The deduction under this scheme will be available for three consecutive years if you invest in the scheme in each of these years. The deduction is currently available only in the first year. More importantly, investors will now have a much wider choice of funds to choose. All listed units of equity-oriented mutual funds will now be eligible for investment under this scheme. But do note that there is no change on the RGESS features such as opening a demat account and so on. 2. Interest on home loan You can consider yourself lucky if you are buying a house in 2013-14. Residential property valued less than Rs 40 lakh and with a loan component of less than Rs 25 lakh will enjoy an additional interest deduction of Rs 1 lakh in FY-14. But this must be your first purchase of a property. In case you do not exhaust this amount in FY-14, you can carry the unexhausted amount to the next year. The good news is that this is over above the deduction that you normally get under the income tax act. 3. Inflation-indexed bonds If inflation is biting into your budget, inflation-indexed bonds may help you hedge. The Finance Minister has proposed issue of these bonds in the current fiscal in consultation with the RBI. So keep watch for any updates on this. 4. Reduction in Securities transaction tax You mutual fund units will now suffer almost nil securities transaction tax. From Rs 25 suffered for every Rs 10,000, it would now be close to nil. See table below for details:

But. Commodity transaction tax introduced

If you are an avid commodity trader, then you may feel a mild pinch in the form of commodity transaction tax of 0.01% on non-agri commodity futures. This segment of the trading market, has for long, not been taxed like the equity derivatives and hence this equitable provision. 5. Marginal rebate for lower income tax bracket While the income tax slabs remain unchanged, you will get a marginal rebate if you are in the Rs 2-5 lakh tax bracket. Rs 2000 is the rebate you will enjoy under Section 87. A rebate is nothing but a deduction from the tax calculated. So if you have an income of Rs 2.2 lakh, then the 10% tax on Rs 20,000 (over and above Rs 2 lakh) is Rs 2000. You will get a deduction of Rs 2000 on this. That means there would be no tax if your income is upto Rs 2.2 lakh. For the others, if your income is less than Rs 5 lakh you will get a maximum deduction of Rs 2,000 on the tax amount. 6. Life insurance for disabled Any sum received from a life insurance policy (including bonus) is normally exempt if its premium does not exceed 10% of the capital sum assured. But since the policy premium for disabled is often high, this limit has been liked to 15% under Section 10(10D). Similarly, the same criteria will apply for claiming deduction on premium paid for disabled persons under Section 80C. Marginal as this may seem, this will help bring some relief for policies that were earlier disqualified for tax purposes. WHERE IT PAINS 7. Dividend distribution tax on debt funds Currently, mutual funds suffer 25% DDT on liquid fund dividends paid and 12.5% on other debt funds. This tax is levied at the AMCs end but nevertheless pinch the investor in terms of lower NAV. Now, an uniform rate of 25% will be charged on all debt funds. This is likely to hurt investors using the dividend reinvestment route, especially for less than a year period. With this, any tax advantage of a dividend payout or dividend reinvestment option vis--vis the growth option becomes negligible. The effective date, though, is June 1, 2013. 8. TDS on property Sale of any land or property other than agricultural land will henceforth entail a 1% TDS by the buyer of property whose deal value is over Rs 50 lakh. What will this do? This will essentially create a reporting mechanism for the tax department on property transactions and help curb tax avoidance incidences and also widen the tax base. This amendment is effective June 1, 2013. 9. Surcharge on super rich If you have an annual income exceeding Rs 1 crore, a surcharge of 10% will be levied on such income. For instance, if you had an income of Rs 1.1 crore, then you would shell out

an additional Rs 30,900. But this pain may be for just a year as the budget proposes it only for FY-14. 10. Service tax on luxury homes and air-conditioned hotels You will now pay service tax on any air-conditioned restaurant you go to, to enjoy food. That may well burn a hole in your pocket, if you are a foodie Similarly, if you are buying an apartment over 2000 sq. ft or over Rs 1 crore in value, you may feel the service tax pain more. Thus far, service tax was paid on 25% of the house value but it will now be increased to 30% of the value of the house (for the above luxury category).