Mutual Fund
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Mutual Fund is not necessarily all about equity or stocks.
Mutual funds also deal into debt instruments like Certificate of Deposits (CDs), Bonds, Govt. Securities (G-Sec.), Non-convertible Debentures (NCDs) etc. This means that a mutual fund scheme can also have all or some of these debt instruments in its portfolio. MF schemes that are having debt papers of very small duration are least risky. Similarly, carefully chosen debt MF schemes can be as safe as fixed deposits along with better tax-adjusted return.
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Starting your investment in Mutual Fund is easy.
All you need is to be KYC compliant and have an active bank account. That’s it.
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Investment in Mutual Fund can be made in lump sum or systematically.
A. Through Systematic Investment Plans ( SIP ) you can invest a fixed amount at regular intervals for any number of years. This way your investments will reap the benefit of rupee cost averaging i.e. buying more units when price is low and buying lesser units when price is high.
B. If you need regular withdrawals from your Mutual Fund investment, then Systematic Withdrawal Plan ( SWP ) is the best option. Here a fixed amount (set by you) will be automatically withdrawn for preset number of years. Depending on the fund available and withdrawal amount, this will continue.
C. If you are concerned about short term volatility while making a lump sum investment, then go for Systematic Transfer Plan ( STP ). Here, the lump sum money will be first invested in a liquid scheme (low risk debt fund) and then from there, a fixed amount will be transferred to a chosen equity scheme of the same fund house. This way, exposure in equity scheme will be made on a staggered basis and hence risk is minimized in case of volatile market movements.
How are your Mutual Fund investments taxed?
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Taxation of Dividends Offered by Mutual Funds
As per the amendments made in the Union Budget 2020, dividends offered by any mutual fund scheme are taxed in the classical manner. That is, dividends received by investors are added to their taxable income and taxed at their respective income tax slab rates. Previously, dividends were tax-free in the hands of investors as the companies paid dividend distribution tax (DDT) before paying dividends.
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Taxation of Capital Gains of Equity Funds
Equity funds are those mutual funds where more than 65% of it total fund amount is invested in equity shares of companies. As mentioned above, you realise short-term capital gains if you redeeming your equity fund units within a one year. These gains are taxed at a flat rate of 15%, irrespective of your income tax bracket. You make long-term capital gains on selling your equity fund units after holding them for over one year. These capital gains of up to Rs 1 lakh a year are tax-exempt. Any long-term capital gains exceeding this limit attracts LTCG tax at 10%, without indexation benefit.
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Taxation of Capital Gains of Debt Funds
Debt funds are those mutual funds whose portfolio’s debt exposure is more than 65% and equity exposure is not more than 35%. Starting 1st April 2023, the debt funds will no longer receive indexation benefit and deemed to be short-term capital gain. Therefore, the gains from debt funds will now be added to your taxable income and taxed at the slab rate. Earlier, the long-term capital gains from debt funds were taxed at 20% with indexation benefit.
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Taxation of Capital Gains of Hybrid Fund
The rate of taxation of capital gains on hybrid or balanced funds is dependent on the equity exposure of the portfolio. If the equity exposure exceeds 65%, then the fund scheme is taxed like an equity fund, if not then the rules of taxation of debt funds apply. Therefore, it is essential to know the equity exposure of the hybrid scheme you are investing in, if not then you might be in for a nasty surprise on redemption of your fund units. The following table summarises the rate of taxation of capital gains on mutual funds:
Fund type
Short-term capital gains
Long-term capital gains
- Equity funds
- Hybrid equity-oriented funds
15% + cess + surcharge
Any gains above Rs 1 lakh is taxed at 10% + cess + surcharge
- Debt funds
- Hybrid debt-oriented funds
Investor’s income tax slab rate
Investor’s income tax slab rate
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Corporate Fixed Deposits
- Corporate Fixed Deposit also popularly known as Term Deposit is an investment option wherein interest rate is fixed for a predefined term.
- Deposits placed by an investor with companies are known as Company/Corporate Fixed Deposit. These deposits are accepted by manufacturing companies, financial institutions, and non-banking finance companies. Deposits mobilized by these companies are governed by the Companies Act u/s 58A.
Basic Info About Corporate Fixed Deposit
- The tenure of company FDs can range from a few months to a few years.
- You can choose from monthly, quarterly, half-yearly, yearly or cumulative interest payment option.
- The interest income rate earned on FD is added to your income and is taxed as per your income tax slab.
- In cases where the annual interest income exceeds Rs 10,000; TDS will be deducted by the company.
- If you do not want the TDS to be deducted, you need to submit form15G/H with the company.
Bonds & NCD’s
They cannot be transferred or converted to equity, unlike convertible debentures that can be converted by the issue of company shares. NCD issues are rated by credit rating agencies like CRISIL, ICRA, FITCH, and CARE to ensure the company's ability to service the debt on time & lower default risk. NCDs can either be secured or unsecured. NCDs secured by the issuer company's assets to fulfill the debt obligation is considered secured NCDs.
If the NCD is held till maturity, the interest earned is added to the total income & taxed at a marginal rate of income tax as per the appropriate tax slab. If the NCD is sold before maturity, Short Term or Long-Term Capital Gains Tax is applicable.
Why Fixed Income Instrument?
- Earn more than Bank FD - Company FDs would earn more interest income than Bank FDs.
- Choose your Interest frequency - You can choose between monthly, quarterly, bi annual and annual interest options.
- Invest based on Rating - CRISIL and ICRA rating are available for Company FDs which help you assess risk.
Insurance
Term Insurance
A Term insurance is the most comprehensive form of financial protection. It will helps you prepare for such uncertainties. One of the most cost-effective methods by which to mitigate risk, Term insurance is popular primarily because it asks for low premiums yet the family of the deceased gets the entire amount.IT is the minimum required to provide financial security for your dependents in case of your untimely demise.
Many people buy Term insurance for death cover and invest their savings in other avenues (such as MUTUAL FUND, PPF etc) to meet their income and capital requirements while they are alive. One requires to keep a few things in mind before buying a term insurance. A few basic points to be remembered are:
- The term insurance should be able to provide the family with the adequate income in case of an unfortunate death.
- The tenure of the term plan should cover the span that an individual intends to work. A term insurance should cover at least 60-65 years.
Some reasons why anyone should buy term insurance:
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Low Premium
Since there is no investment element in the insured amount, the premium for all term plans are much lower than any other insurance plans. Any individual might have to pay only about one percent of his annual income to get a life cover. Since this element is not there in the insured amount, the premium for term insurance is less than that of other insurance policies. For example., A policy of 1 Crore would have a premium of only Rs 12,000 per year.(Below 30 age)
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Provides Financial Security
An untimely death is unfortunate and so are the financial liabilities that require to be borne by the family. To prevent such a situation from arising, it is a good idea to invest in a term plan that would take care of the financial needs of the family.
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Low Claim Rejection
When you buy any term plan, make sure you disclose correct facts about your health condition, finances, habits etc. As per the recent Insurance Regulatory and Development Authority (IRDA) mandate, no insurance company can claim that there has been a non-disclosure of facts after three years of the policy becoming effective.
Annuity Insurance
You can select from a range of annuity plans based on your requirements. You can choose between immediate and deferred annuities, both of which offer fixed or variable returns. Annuity plans are an efficient retirement planning tool since they provide guaranteed income to help you meet your financial obligations once you retire. Annuities also help mitigate longevity risk, which is the risk of outliving one's savings. You can get a steady income stream for the rest of your life with an annuity plan.
Many people find annuities complex, often opting for other retirement plans instead of them. Here, we'll help you make sense of annuities and help you better understand how they can help you during retirement.
What are the different types of annuities?
There are two types of annuities:
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Immediate annuity plans
There is no accumulation phase and the plan starts working right from the vesting phase. It is purchased with a lump sum and the annuity payment starts immediately either for a limited tenure or lifetime.
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Deferred annuity
These are the pension plans in which the annuity starts after a certain date. It can be further divided into the following: The annuities may also vary basis the type of payout you receive:
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NPS
- It is a retirement plan. A working individual can deposit a certain amount every month or invest a lump sum in the NPS account.
- A registered pension fund manager invests this money in equity (E), corporate bonds (C) or government securities (G).
- These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.
- Every Indian citizen having an age between 18 and 65 years including non-resident Indians (NRIs)** can invest in NPS.
What are the tax benefits?
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Tax Deduction under section 80C
Under Section 80C, a salaried individual can get a tax deduction of up to 10% of salary (Basic + DA) maximum upto Rs 1.5 lakh from NPS; for self employed, it is 20% of total income.
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Additional Tax Deduction under Section 80CCD (1B)
1. As you know that, the income tax deduction limit for investments made under Section 80C is Rs 1.5 lakh.
2. But now you can claim an additional deduction of Rs. 50,000 by investing in NPS under Section 80CCD (1B).
This brings the total deduction to Rs 2 lakh. Remember, this deduction benefit is available only on Tier 1 NPS accounts. Tier 2 account is not eligible for any tax deduction. Read ahead to know more about features. -
Options fitting your needs
There are two types of NPS accounts: Tier 1 and Tier 2. Both differ on several parameters like:
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Offers Flexibility in choosing the desired asset allocation
NPS offers 2 choices for asset allocation between Equity and Debt: Active and Auto choice
Besides this, it provides flexibility to subscriber to change Pension Fund Manager once in a financial year and investment Option twice in a financial year.