Budget Impact Debt Mutual Fund
Budget Impact Debt Mutual Fund
Budget Impact Debt Mutual Fund
Ltd. and is meant for use of the recipient only and is not for circulation. This document is not to be reported or copied or made available to others. It should not be
considered to be taken as an offer to sell or a solicitation to support any security. The information contained herein is obtained and collated from sources believed reliable and we do not represent it as accurate or complete and it should not be relied upon as such.
The opinion expressed or estimates made are as per the best judgment as applicable at that point of time and are subject to change without any notice. GEPL Capital Pvt. Ltd. along with its associated companies/ officers/employees may or may not, have positions
in, or support and sell securities referred to herein.
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Budget Impact on Debt Mutual Fund
11
th
July, 2014
Budget Speech on Mutual Fund:
Point 1:205. In the case of Mutual Funds, other than equity oriented funds, the capital gains arising on transfer of units held for more
than a year is taxed at a concessional rate of 10% whereas direct investments in banks and other debt instruments attract a higher rate of
tax. This allows tax arbitrage opportunity. This arbitrage has hardly benefitted retail investors as their percentage is very small among
such Mutual Fund investors. With a view to remove this tax arbitrage, I propose to increase the rate of tax on long term capital gains
from 10% to 20% on transfer of units of such funds. I also propose to increase the period of holding in respect of such units from 12
months to 36 months for this purpose.
Point 2:206. In the year 2003, the tax liability on income by way of dividends was shifted from the shareholder to the company. The
shareholder was required to pay tax on the gross dividends, but now the company pays tax on the dividend amount net of taxes.
Similarly, in the case of Mutual Fund, income distribution tax is paid on the income distributed net of taxes. I propose to remove this
anomaly both in the case of the company and the Mutual Fund.
Impact of Budget on Debt Mutual Fund (Any mutual fund which is holding less than 65% Equity in its portfolio)
The above two points will have a negative impact for investors
Point1: The period for long term capital gain tax from 1 year has been increased to 3 years. Hence investors who invested in open
ended funds can consider holding for a longer period and benefiting from the long term capital gain after 3 years. However closed
ended 1 year (FMP), fund holders will have to pay short term capital gain tax.
Points 2: The Dividend Distribution Tax calculation hhas moved from net basis to gross basis. The Impact of this would be lower the
post tax return.
In Equity mutual fund there is NIL dividend distribution tax while in debt the changes of current with new.
Please see the below illustrate which shows the difference in dividend as well as with new taxation:
Assumption:
Time frame considered 90 Days
Yield has taken at last 3 months average performance of Ultra short Fund (9.09%P.A.)
Bank FD Rate for 6 Months is 8.50%P.A
The Surcharge will be applicable for 30% tax backet
The Cess applicable for all tax prayers
EQUI TY | F&O | DP | COMMODI TI ES | MUTUAL FUNDS | I NSURANCE | DEBT | I POs | PMS | WMS | LAS | CURRENCY DERI VATI VES
Disclaimer: This document has been prepared by the Research Desk of M/s. GEPL Capital Pvt. Ltd. and is meant for use of the recipient only and is not for circulation. This document is not to be reported or copied or made available to others. It should not be
considered to be taken as an offer to sell or a solicitation to support any security. The information contained herein is obtained and collated from sources believed reliable and we do not represent it as accurate or complete and it should not be relied upon as such.
The opinion expressed or estimates made are as per the best judgment as applicable at that point of time and are subject to change without any notice. GEPL Capital Pvt. Ltd. along with its associated companies/ officers/employees may or may not, have positions
in, or support and sell securities referred to herein.
GEPL Capi tal Pvt Ltd | ( 022) 6614 2790 | mutual funds@gepl capi tal . com | www. gepl capi tal . com
Holding Period -90 DAYS
Investor Tax Slab
Dividend 0% Tax Bracket 10% Tax Bracket 20% Tax Bracket 30% Tax Bracket
Current
#
New Tax
$
Growth Bank FD Growth Bank FD Growth Bank FD Growth Bank FD
Net Amount 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Yield 9.09% 9.09% 9.09% 8.50% 9.09% 8.50% 9.09% 8.50% 9.09% 8.50%
Repurchase Price 102.17 102.17 102.17 102.03 102.17 102.03 102.17 102.03 102.17 102.03
Gain 2.17 2.17 2.17 2.03 2.17 2.03 2.17 2.03 2.17 2.03
Actual Tax Rate 22.08% 28.33%
Tax Rate 28.33% 28.33% 0.00% 0.00% 10.30% 10.30% 20.60% 20.60% 33.99% 33.99%
Tax 0.48 0.61 0.00 0.00 0.22 0.21 0.45 0.42 0.74 0.69
Post Gains Tax 1.69 1.55 2.17 2.03 1.95 1.82 1.72 1.61 1.43 1.34
Value of Investment 101.69 101.55 102.17 102.03 101.95 101.82 101.72 101.61 101.43 101.34
Post Tax CAGR 7.03% 6.45% 9.09% 8.50% 8.13% 7.60% 7.17% 6.71% 5.93% 5.55%
# DDT rate is applicable till 30 Sept.2014
$New Tax will be applicable from 1 Oct. 2014
By above illustration investors who are in the 30% tax bracket are advised to consider Dividend option while all other investors should
consider Growth option for investment.
Our View:
The product like Liquid, Ultra short funds are more suited with better pre tax return over short term bank fixed deposits. Hence we
suggest investors to hold the Liquid and ultra short term as they are more tax efficient
FMP (Fixed Maturity Plan) will be not in favor now as they are pre tax not equivalent to Bank FD.
Short Term Debt fund: Investors who wants to invest into short term debt funds should consider accrual scheme as they will be less
volatile in nature and as against Bank Fixed Deposits.
Other More tax efficient and options Mutual funds:
Arbitrage Fund: These are equity oriented funds and hence tax liabilities will be of equity (Long term Capital Gain -0% after 12 Months;
Short Term capital Gain Tax -15%+ surcharge {below 12 Months} and Dividend Distribution Tax -0%). These are less risky as they utilise
arbitrage into equity segments.
What investor should do?
Please see below the matrix for investment with time frame for low risk taking mutual fund investors.
Time Frame Product for Investment
Below 3 Months Ultra Short Debt Fund
3 Months to 36 Months Arbitrage Fund
36 Months plus Accrual Debt