I am 27 years old and had been investing in mutual funds through monthly SIP of Rs 5000 in ELSS and diversified equity funds. I maintain a reserve of Rs. 40000 in my bank account, which is giving me 3.5 per cent p.a. I was planning to buy a liquid fund, so that this idle money can generate some return for me. With the increase in DDT (Dividend Distribution Tax), can you please suggest some approach to follow for this reserve money?
-Deepak
For individuals the DDT has increased to 28.33 per cent (with surcharge) on liquid and money market funds. But it would be applicable only if you invest in the dividend option of the scheme. If you invest in the growth option, you will be liable to pay taxes only when you redeem these funds. The rate of tax applicable in case of short-term gains (when investments are redeemed before one year) is the same in case of the TDS paid on interest earned on bank deposits. For long-term capital gains (investment of more than a year) the tax payable is 10 per cent without indexation (indexation is an adjustment made for inflation) or 20 per cent with indexation whichever is lower. Therefore, you could look at investing these funds in the growth option of a liquid fund.
This article was originally published on June 21, 2007.
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