Finance minister Mr P.Chidambaram in one of the award function asked the recipient of the award "What is your wish list in this year's budget" and the recipient "he din want to pay more taxes" and the recipient is none other than India richest person Mr Mukesh Ambani. In return FM commented that "India is a country where a normal person as well as the richest person does not want to pay taxes".
If Mukesh Ambani himself is more conscious about paying taxes, aam aadmi like you and me should be trying to save taxes in a judicious manner. So lets see how we can reduce taxes on Fixed Maturity Plan by double indexation.
How is the profit taxed from debt mutual funds?
Debt mutual funds have a long term capital gain tax which is taxing the interest if the investment is held for more than a year. There are two methods of taxation.
1. 10% on the interest gained without indexation.
Taxable amount = Amount Returned - Amount Invested
2. 20% on the interest gained without indexation.
In the second gain, the taxable amount is calculated by
Taxable amount = Amount Returned – (Amount Invested * Inflation Index for Redemption financial Year/ Inflation Index for Investment financial Year)
Inflation index for every year is released by the govt.
Lets understand this concept with an example.
Assuming an FMP of 15 months returning 11% and Rs 10,000 is invested. Inflation index for 2006-2007 100 and inflation index for 2007-2008 is 105 and for 2008-2009 is 111. s Tax is calculated using indexation at the rate of 20%.
Scenario 1:
Amount invested in sep 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 / inflation index for 2007-2008))
= 11000 - (10000 * 111/105)
= 11000 - 10571 = 430
Tax @ 20% = 20% of 430 = 86
Amount redeemed = 10914.
Scenario 2:
Amount invested in Mar 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 / inflation index for 2006-2007))
= 11000 - (10000 * 111/100)
= 11000 - 11100 = -100
Net Loss = 100 and hence no tax.
Amount redeemed = 11000
So in this case we have totally avoided tax.
Hence while planning an FMP investment, we should plan it in such a way that it spans two financial years to get the advantage of double indexation.
Showing posts with label debt investment. Show all posts
Showing posts with label debt investment. Show all posts
What to look for in a Fixed Deposit?
Fixed Deposit is considered as a safe haven for the investors, but there is some level of scrutiny to be done even in Fixed deposits. Fixed Deposits are not offered only by public sector banks, they are offered by large corporates, co operative banks and other financial institutions. So the FDs in non psu banks are not "totally" secure. They can technically default on payments if the financial institution is caught in a trouble.
Though the occurence of such an event is very minimal, lets look at some basic fundamentals to look at before putting your money in a FD.
Credit Profile
Check for the credit ratings of the instruments in which the bank FD is depositing the money.The rating of AAA is of higher quality. The higher the credit rating, the lower the return it delivers. Do not chase for a FD which gives 2% extra than the other prevailing FDs, because the risk exposure is higher in such a FD.
Rate of Return
Check the return on FDs prevailing in the market and choose an FD which is relatively equal or slightly higher than the rest of FDs in place.
Interest Payout
Check out the different interest payout options. Some banks provide monthly,quarterly interest payout. Suppose you want a steady monthly income, you can opt for monthly interest payout option. If you are growth investor, you can opt for the interest to be accrued to the prinicpal in the end of an year.
Duration
Find a FD which matches your requirement of fund down the line. If you want fund 3 years down the line, go for a FD with 3 years duration. You will get benefited from the compounded interest rate over 3 years.
Premature withdrawal penalty
People often quit an lower interest rate FD and go for a higher interest rate FD. In such a case, you need to pay a penalty for breaking the FD. So you need to take into account the expense of breaking the existing FD and opt for a new FD.
Though the occurence of such an event is very minimal, lets look at some basic fundamentals to look at before putting your money in a FD.
Credit Profile
Check for the credit ratings of the instruments in which the bank FD is depositing the money.The rating of AAA is of higher quality. The higher the credit rating, the lower the return it delivers. Do not chase for a FD which gives 2% extra than the other prevailing FDs, because the risk exposure is higher in such a FD.
Rate of Return
Check the return on FDs prevailing in the market and choose an FD which is relatively equal or slightly higher than the rest of FDs in place.
Interest Payout
Check out the different interest payout options. Some banks provide monthly,quarterly interest payout. Suppose you want a steady monthly income, you can opt for monthly interest payout option. If you are growth investor, you can opt for the interest to be accrued to the prinicpal in the end of an year.
Duration
Find a FD which matches your requirement of fund down the line. If you want fund 3 years down the line, go for a FD with 3 years duration. You will get benefited from the compounded interest rate over 3 years.
Premature withdrawal penalty
People often quit an lower interest rate FD and go for a higher interest rate FD. In such a case, you need to pay a penalty for breaking the FD. So you need to take into account the expense of breaking the existing FD and opt for a new FD.
What are different types of debt investments?
While searching for investment products which is aimed at capital protection and fixed returns, we turn our attention to various debt products available for investment. Let us go through some of them which is not very familiar with the normal investor community.You can see the following categories in the portfolio of almost all debt mutual funds.
1. Central Govt Securities - These are the most safest debt investment that one can make. They don have any default in payments.Even in case of bad situations, the government can print currency and payback the investment to the investors.
2. State Govt Securities - These are provided by respective state government and are less liquid compared to central govt securities. It has a higher yield than central govt securities and it may default on payment but in history it has never happened.
3. Public sector bonds - These are issued by public sector undertakings who borrow funds from the markets in terms of bonds.
4. Domestic Financial Institutaion bonds - These are provided by financial institutions like IDBI,ICICI and these are unsecured bonds.
5. Corporate Debentures - Private sector companies raise fund from investors through corporate debentures.
6. Commercial Paper - Private companies meet short term(1-6 months) fund requirements through commercial paper.
7. Certificates of Deposit - These are issued by banks and financial institutions.
Apart from these , there are other common products such as kisan vikas patra(money doubles in 8 years 7 months),NSC,Post office Deposits,Senior citizen scheme in post office,GOI bonds,PPF and Bank FDs.
Learn more about Debt investment
1. Central Govt Securities - These are the most safest debt investment that one can make. They don have any default in payments.Even in case of bad situations, the government can print currency and payback the investment to the investors.
2. State Govt Securities - These are provided by respective state government and are less liquid compared to central govt securities. It has a higher yield than central govt securities and it may default on payment but in history it has never happened.
3. Public sector bonds - These are issued by public sector undertakings who borrow funds from the markets in terms of bonds.
4. Domestic Financial Institutaion bonds - These are provided by financial institutions like IDBI,ICICI and these are unsecured bonds.
5. Corporate Debentures - Private sector companies raise fund from investors through corporate debentures.
6. Commercial Paper - Private companies meet short term(1-6 months) fund requirements through commercial paper.
7. Certificates of Deposit - These are issued by banks and financial institutions.
Apart from these , there are other common products such as kisan vikas patra(money doubles in 8 years 7 months),NSC,Post office Deposits,Senior citizen scheme in post office,GOI bonds,PPF and Bank FDs.
Learn more about Debt investment
What is Fixed Maturity Plan?
FMP or Fixed Maturity Plan is closed ended mutual fund with the following features.
1.It is a fixed tenure fund.
2. It is a debt fund.
3. Generates income while protecting the capital by investing in money market instruements and debt instruments.
4.Tenure ranges from one month to 5 years.
5.It invest in debt instruments which has maturity linked to the fund's tenure.
6.Not sensitive to interest rate volatility when held till maturity.
7. Lower Tax rate than banke fixed deposits.For bank FD, the income tax slab rate is applied.
Who can invest in FMP?
If you are not a risk-free investor and look for an assured income, this is the right option for you.
1.It is a fixed tenure fund.
2. It is a debt fund.
3. Generates income while protecting the capital by investing in money market instruements and debt instruments.
4.Tenure ranges from one month to 5 years.
5.It invest in debt instruments which has maturity linked to the fund's tenure.
6.Not sensitive to interest rate volatility when held till maturity.
7. Lower Tax rate than banke fixed deposits.For bank FD, the income tax slab rate is applied.
Who can invest in FMP?
If you are not a risk-free investor and look for an assured income, this is the right option for you.
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Investment Rules
Investment is a simple concept which is often complicate too much by investors. Always "keep it simple" and be "disciplined" in investments. There are certain rules that needs to be followed while investing for a longer term.
1.Identify your short,medium and long term goals.
2. For Short and medium term goals(2-5), park your money in fixed income instruments and avoid going the equity route.
3. For long term goals (>5 years), go for equity investing.
4. Keep it simple in equity investing. Go for good diversified mutual funds with good track record.
5.Ignore hot sectors or stocks which are being most talked about in televisions and newspapers.
6.Invest Regularly. Start a SIP(Systematic Investment Plan) in mutual funds to bring in discipline in your investments.
7.Execute "Buy and Hold" policy. Do not churn your investments often.
8. Last but not least, "Start Early".
Happy Investing!
1.Identify your short,medium and long term goals.
2. For Short and medium term goals(2-5), park your money in fixed income instruments and avoid going the equity route.
3. For long term goals (>5 years), go for equity investing.
4. Keep it simple in equity investing. Go for good diversified mutual funds with good track record.
5.Ignore hot sectors or stocks which are being most talked about in televisions and newspapers.
6.Invest Regularly. Start a SIP(Systematic Investment Plan) in mutual funds to bring in discipline in your investments.
7.Execute "Buy and Hold" policy. Do not churn your investments often.
8. Last but not least, "Start Early".
Happy Investing!
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