What are the advantages of investing in debt funds, when the returns they give are just around 8 per cent or less? I believe the same can be attained by investing in a normal fixed deposit.
- Jagadeesh Kumar Kanakala
Fixed deposits are safer investments because your return is guaranteed. But the main reason why debt funds are preferred over fixed deposits is the advantage in the tax treatment of gains and income. Any gains or income on fixed deposits are added to the investor's income and taxed accordingly, irrespective of the investment tenure. So if you are in a higher tax bracket, it works much to your disadvantage.
In case of debt funds, the tenure matters. The gains get added to the investor's income if the fund is redeemed within a year of investment. Any redemption after a year commands a long term capital gains (LGTG) tax of 11.33 per cent (without indexation) or 22.66 per cent (with indexation). It is worthwhile noting that the government levies a Dividend Distribution Tax (DDT) on debt funds which is borne by the fund house (but ultimately passed on to the investor). This DDT is 14.16 per cent of the dividend declared. Nevertheless, an investor would generally benefit by opting for an investment in a debt fund over a period of more than a year.
This article was originally published on April 01, 2010.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
