December 2013

Investors can take advantage of Investing in Double Indexation FMP’s

Double INdexation Tax benefits, Fixed Maturity Plans, FMP's, Inflation adjusted Bonds

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  There is no TDS deduction in FMP’s , which is an obvious drawback in FD’s as the TDS deducted in FD’s does not earn any interest. Thus Longer duration FD’s suffer in terms of returns.

Please note that the drawback of investing in FMP’s is illiquidity, hence only surplus funds should be parked which will not be required to meet any financial goals during the said timeframe.

Double Indexation FMP’s are round the corner which offer tremendous tax advantage vis-a-vis FD’s . Smart Investors take advantage of investing in FMP’s which offer the safety of capital similar to FD’s and also the tax advantages.

What is double indexation and how does it work? Here is a simple example.

Investors can claim double indexation benefit if the holding period is over three financial years. Consider the case of a 500-day FMP, which starts on 20 Dec 2013 and matures on 04 May 2015. Since it is spread over three financial years-2013-14 (investing year), 2014-15 (holding year) and 2015-16 (redemption year)-the indexation will be for two years . In this case, in all probability, one can report a long-term capital loss (instead of gain) and it can be set off against other long-term capital gains reducing the tax liability further.

Leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. typically come up with Double indexation FMP’s starting December of every year through March. You can find the open NFO’s at the AMFI Website : NFO’s

Investors having surplus funds which can be locked away for 1.5 yrs should plan on investing in FMP’s

The advantage of investing in FMP’s over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 9% and so the post tax returns (for the highest tax bracket) is pathetically around 6%

Here is an ET article dated Dec 20 2013 which talks about the benefits of investing in FMPs : Long term FMP a good bet

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.

September 2013

Guidelines – Mutual Fund investments in the name of a minor

Guidelines ,Mutual Fund investments,in the name of a minor, KYC requirements for investing in India, HDFC , ICICIOne can invest in a mutual fund scheme on behalf of a minor. In fact, many funds have plans exclusively targeted at investments for minors. Here are the details.

What are the guidelines regarding investments in the name of a minor?

The minor should be the first and the sole holder in an account. That is, there cannot be a joint holder along with a minor. Joint holder details are not considered

The date of birth of the minor would have to be provided in the application form along with a photocopy of supporting documents such as birth certificate/passport/school leaving certificate.

The guardian in the folio on behalf of the minor should either be a natural guardian (i.e. father or mother) or a court appointed legal guardian and this must be mentioned in the space provided in the application form.

Appropriate documentary evidence would have to be provided in case the guardian is a court-appointed guardian.

Details of documents to be provided are available along with the application form/Key Information Memorandum.

In case the documents and details as mentioned above are not provided, the application will not be processed.

What is the procedure to change the status when a minor becomes a major?

When the units are held on behalf of a minor, the ownership of the units rests with the minor. (more…)

June 2013

Increase in Dividend Distribution Tax from June 01 2013 in Debt Mutual Funds – Impact

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In the FY14 Budget the Finance Minister has proposed to increase the Dividend Distribution Tax (DDT) on Debt Mutual Funds (other than liquid and money market funds on which the DDT was already 25%) from 12.5% to 25% (plus surcharge and cess) for individuals and HUFs. The hike is proposed to provide uniform taxation for all types of funds other than equity oriented mutual funds in the Mutual Fund Industry.
This amendment will take effect from 1st June, 2013.

Classification of Funds: As far as tax implications on Indian mutual funds are concerned, they are classified as three parts as ‘Equity oriented Funds’, ‘Liquid and money market Funds’ and ‘Debt Funds other than Liquid Funds’.

In ‘Equity Oriented Funds’, the categories coming under are Equity Diversified, Equity Sector, Hybrid – Equity Oriented (more than 65% equity) and Arbitrage Funds.

Liquid Funds and Liquid ETF are coming under ‘Liquid Funds’ while Ultra Short Term Funds, Floating Rate Funds, Short Term Income, Dynamic Income, Income Funds, Gilt Funds, Fund of Funds, Hybrid – Debt Oriented (less than 65% equity), MIP, FMPs are coming under ‘Debt Funds other than Liquid Funds’.,

Summary of Changes proposed :

Classification of Debt funds , Short term taxation , dividend distribution tax DDT, Effective yield


Tax on distributed income:Given the tax provision on the distributed income, fund houses pay taxes on the dividend distributed to the investors. Fund houses deduct DDT from the Dividend. So the dividends are tax free in the hands of investors.
Existing tax structure on DDT:As per the existing structure, there is no tax levied on the dividend distributed by Equity oriented mutual fund schemes for any investors. But, Liquid and money market Funds are liable to pay the DDT of 25% (plus surcharge and cess) for retail investors while the funds other than Liquid and money market funds are liable to pay DDT of 12.5% (plus surcharge and cess).

For institutions and corporates, DDT on Equity funds is nil while 30% (plus surcharge and cess) in case of the dividends from the investments in Liquid Funds and debt funds other than Liquid funds.

Proposed Structure: From June 01, 2013 onwards, retail investors who invest in all debt funds (other than equity funds) are liable to pay DDT of 25% (plus surcharge and cess) on the dividend income. The DDT for corporate investors has been kept unchanged at 30% (plus surcharge and cess).
Increase in Surcharge: Further, the surcharge on Dividend Distribution Tax for all mutual fund schemes has gone up from 5% to 10%.
Impact: This move will make dividend options in Debt Mutual Funds unattractive for retail investors. Because the net post tax return in the hands of the investors from dividend plans would be lower as the DDT charged on the debt funds has been increased from 12.5% to 25% (plus surcharge and cess). Meanwhile, the Growth options in the Debt Mutual Funds will become attractive for retail investors who redeem the investments after a year, taking advantage of long term capital gains.

Capital Gain: Since the DDT is applicable for Dividend plans, Capital Gains tax is applicable to Growth plans. The gains from the debt mutual scheme (growth option) are taxed depending on the period the investments in the mutual funds are kept. If the debt mutual fund units are redeemed after a year, then the gains thereon are liable to Long Term Capital Gain tax while the proceeds from the investments which redeemed before one year are taxed as Short Term Capital Gain. For long term capital gains in debt funds, the investor has to pay the tax @ lesser of 10% without indexation or 20% with indexation; (plus education cess). Short Term Capital Gain is taxed as per the normal slab of the investors. (more…)