I want to invest ₹5 lakh in a liquid fund and do a daily Systematic Transfer Plan (STP). Will it attract capital gains tax? If yes, how much?
- Jaycee Rana
When you park money in a liquid scheme and use the STP method to invest in another scheme, you are redeeming a part of your investment in the liquid scheme and investing the money in another scheme. Since you are parking the money for a short term in the liquid scheme, you will have to pay short-term capital gains tax on your returns from it. If investments in debt funds are sold before three years, it attracts short-term capital gains tax. And short-term capital gains are added to the income and taxed according to the income tax slab applicable to the investor.
If you find the computation of short-term capital gains tax bothersome, you should opt for the dividend reinvestment option while investing in a liquid scheme. Under this option, profits are distributed as dividend by the mutual fund company and it results in nil or almost nil capital gains. Dividends are tax free for investors, but the mutual fund company would pay dividend distribution tax (28.84 per cent) on declared dividends and your profits would be impacted to that extent. However, you don't have to bother about capital gains tax.
This article was originally published on December 08, 2015.
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