Introduction
Debt fund is an
investment fund such as mutual fund or exchange traded fund. It pools money
from investors who wishes to earn fixed return and has less risk taking ability.
It invests their capital in fixed income securities like Government bonds,
T-bills, Corporate Bonds, etc.
Short term
investment and long term investment are two kind of debt fund investment under
which dynamic bond funds, income funds, liquid funds, gilt funds, are some its
types in debt funds.
Short term
investments are for less than 3 years and long term investments are for 3years
more than 3 years. So the taxation on debt funds depends upon its maturity
period and different types.
Taxation
of Debt Funds
Debt funds are
liable to be charged as per the Short term Capital Gain tax and Long term
Capital Gain Tax
Short
term investment debt funds
When the debt
funds are sold within three years of its date of acquisition it will taxed as
per the income tax slabs applicable to the individuals and HUFs.
Long
term investment debt funds
As per section 112
of Income Tax Act, when the debt funds are sold after 3 years or more from its
date of acquisition, it carries a tax rate of 20% with indexation and 10%
without indexation with the surcharge and cess. The amount earned under LT`CG
are taxed separately and is also eligible for the benefit of indexation of the
acquisition cost. The LTCG is computed by reducing indexed cost from the net
selling price.
Formula for the
calculation of:
Indexed cost of
acquisition= Original cost of acquisition*(CII of year of sale/CII of year of
purchase)
Income
tax slabs for individuals and HUFs for FY 2019-2020
|
Income
tax slabs
|
Tax
rate
|
|
Up to Rs 2,50,000
|
Nil
|
|
Rs 2,50,001 to Rs 5,00,000
|
5% of total income exceeding Rs 2,50,000
|
|
Rs 5,00,001 to Rs 10,00,000
|
Rs 12,500 + 20% of total income
exceeding Rs 5,00,000
|
|
Above Rs 10,00,000
|
Rs 1,12,500 + 30% of total income
exceeding Rs 10,00,000
|
Example:
Let’s take an
example of a Research Analyst who earns Rs 9,00,000 per annum and had invested
Rs 1,00,000 in debt. For further information, kindly refer the below given
table:
|
Short
term capital gain
|
|
Long
term capital gain
|
|
|
Period
|
2 years
|
Period
|
3 years
|
|
Tax
slab bracket
|
20%
|
Tax
slab bracket
|
20% with indexation
|
|
Returns
|
10000
|
Cess
charge
|
3%
|
|
Tax
Amount
|
2000
|
Total
tax rate
|
20.09%
|
Conclusion
Debt funds yield
lower returns but it is good for investors with less risk taking ability.
Hence, debt funds with short term investments are taxed as per the tax slabs
and debt funds with long term investments are taxed by considering applicable
tax rate, indexation cost and cess charges.
Regards
Author- Jagruti
Kautilya
IBS Mumbai
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