Look at tax structure by investing in debt products
The downward trend in the stock market, combined with rising interest rates, resulted in the debt instruments are gaining in popularity. Of course, varies debt instruments with respect to safety, coupon rate and liquidity. Even the term “permanent income” is misleading because it only applies to certain investments held to maturity, such as fixed deposit and bonds.
Here, the main risk is the default. Net asset value or NAV, options like debt mutual funds in all shades from a position of market risk and therefore are not somehow “fixed” in the word. In addition to these differences, investors should be aware of the difference in tax treatment of debt instruments.
Term deposits and corporate bonds: The interest on these amounts taxed as per slab investor income tax, making it unattractive to investors in tax bracket higher (30%). They also do not enjoy the advantage of being indexed to the cost of inflation. Therefore, if long-term fixed deposits and corporate bonds (maturing after one year or more), your money loses its value because of inflation. Many investors are unaware of this insidious side effect.
The savings of small government: Some of the most popular avenues include plans for the post office monthly income (Pomis), Kisan Vikas Patra (KVP), Public Provident Fund (PPF) and National Savings Certificates (NSC). Currently, all are subject to administered interest rates. Therefore, their popularity increased during states of low interest rates. Again, the tax treatment is not uniform.
KVP-term interest rates and interest rate and maturity of the bonus earned by post office monthly income are taxed at the rate of tax assessee of income. NSC interest is taxed on an accrual basis. However, instead of interest rates is to get the tax advantage ยง 80C. PPF is the only one who enjoys a tax equal to zero at all levels – of investment, accumulation and withdrawal.
While the interest savings of the elderly is taxed at the assessed person, the burden of investors may be less, since they usually receive this income in retirement and therefore the tax burden was too small.
The mutual fund of debt: To be NAV-based, it is not of fixed income instruments in the strictest sense, leading to some uncertainty in the returns. They were seen as instruments of tax arbitrage by companies to the cash gap was closed a few years ago and all other debt funds as of April 1, 2011.
Currently, the dividend distribution tax (DDT), 30% applied on dividends earned outside of the liability systems of individuals’. Companies typically use debt funds parked in short-term surpluses, and so did not want the “growth”. Even if they do, they usually sell within a year. That’s why they have to pay short-term capital gains to 30%. Private investors choosing the dividend distribution tax on dividends of 25% applied on cash and 12.5% for debt funds.
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Investors choose the growth option may elect either to pay 10.30% or 20.60% of capital gains in the long term (LTCG) tax depends on two factors. One, if they sell their units after a holding period of one year or more, or two, if they choose to take advantage of the index of cost inflation or not. There are two events that have the potential to change the landscape of debt instruments.
Recent Reserve Bank of India (RBI), the committee set up to reform the small savings schemes has been recommended that the current system will provide a market where prices are determined.
The proposed new direct taxes code (DTC), which should come into force on April 1, 2012, subject to approval by Parliament, proposes to tax all income from debt funds at a rate of imposition of the assessee is. So while inflation indexation IT costs, assets must be made in more than one year from the end of the year in which it was purchased.
This proposal is required to have a profound impact on providers of fixed maturity plans, which can no longer be able to sell on the basis of the tax benefit they claim to offer double indexation now. So beware of agents of mutual funds that try to sell you the plans in the last quarter of this year.
Source: [Financial exapress]
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