I have a lump sum of ₹90 lakh. My investment horizon is 5 to 8 years. As per your previous columns, I understand that investing this money in a debt or liquid fund and then doing a STP to a balanced or equity fund is a good approach. However, I am unclear about the tax treatment under this method. Since the money will get withdrawn from debt fund in less than 3 years, will it not attract capital gains/income tax? Please clarify.
- Girish Sidana
Yes it will. Funds transferred from one mutual fund to another through STPs are considered as redemptions from one fund and a fresh purchase in another, for taxation purposes. Therefore, if you park money in the Growth option of a debt fund and do an STP before the completion of three years, it will attract short term capital gains tax, as this will be considered as redemption from debt fund. These gains will be added to your income and taxed according to your tax slab. .
Investing in the Dividend or Dividend Reinvestment option of debt funds to do this STP will make the transfer tax-free in your hands, but as the dividend paid out will attract Dividend Distribution Tax (DDT) at 28.3%, it will dent the amount you can transfer. Plus, you may not be able to benefit from rupee cost averaging as you cannot control the timing or quantum of dividends declared by the debt fund.
This article was originally published on January 01, 2015.
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