Fixed Deposit vs Debt Mutual Fund, which is better? What is the taxation benefit in selecting Debt Mutual Fund?

1. Fixed Deposit
Vs.
Debt Mutual Fund
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2. Introduction
With the Interest rate decreasing, Investors are looking for
an alternative to safe investment with better returns. Debt
Mutual fund is gaining attraction and seems to be
becoming the alternative.
What are Debt Funds
Fixed Deposit vs Debt Funds
Tax Calculation
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3. Debt Fund
Page 6
•A debt fund (also known as an income fund)
is a fund that invests primarily in bonds or
other debt securities.
•Debt funds invest in short and long-term
securities issued by the government, public
financial institutions, companies
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4. It offers
Regular
Income
Capital
Appreciation
Tax
Efficient
Coupon generated from
securities held in the portfolio
helps to generate regular Incone.
Capital appreciation or
depreciation can be generated
due to security price fluctuation
An investor with higher tax
bracket can get befitted due to
indexation benefit.*
*Indexation benefit is available in case of Long term capital gain (investment for more than 3 years) from Debt Mutual funds.
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5. Key
Benefits
•Provides flexibility in investment horizon
•Regular Income with stable returns with Liquidity
•Helps to achieve short to medium-term goals
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6. Features
Short and long-term securities
issued by the government,
public financial institutions,
companies
Accrual Based funds
Fixed Maturity Plans
Dynamic Bond Funds
Short term fund
Medium Term fund
Long Term fund
Gilt Fund
Corporate bond fund
Banking & PSU Bond fund
Based on tenor
Based on Securities
Invests in
Based on style
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7. Investment Period Suitable Product
Up to 3 Months Overnight Funds, Liquid Funds
Up to 1 year Low duration fund, Ultra Short term Fund, Money Market funds
1 to 3 years short duration Funds, Banking PSU Funds, Corporate Bond fund
3 Years & Agove Medium term, Medium to long term, Credit Risk Fund, Dynamic Bond Fund
Different Needs,
Different Products
Map different investment needs and investment horizons with the type of Debt funds that offer the best fit..
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8. Taxation
Dividend
Income
Tax is not deductible if dividend income in respect of units of a mutual fund is below Rs. 5,000 in a financial year. Otherwise Tax
withholding rate is 10% for residents.
As per the income tax slab of Investor
withdrawing from Debt fund.
20% tax on the capital gain
post Indexation benefit*
Tax payable by Investors
based on Income tax slab.
Gain from the investment done
for the period of < 3 years
Gain from the investment done
for the period of > 3 years
Known as IDCW
Short Term
Capital Gain
Long Term
Capital Gain
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9. Indexation
Page 6
Indexation is the reason why debt funds
are considered an excellent fixed-
income investment option when
compared to conventional fixed deposits
(FDs). Indexation makes the game of
investment a win-win affair.
The rate of inflation used for indexation
can be obtained from the government’s
Cost Inflation Index (CII).
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10. Example - Indexation
Let’s say you invested in a debt fund on July 2018. Your investment amount was Rs.10,00,000, and you bought the units at a NAV
of Rs.10. Three years later, you redeem your investments in August 2021 at a NAV of Rs.13. Hence, when you sold your
investments, the value of your investments was Rs.13,00,000 Your investment made capital gains worth Rs.3,00,000.
ICoA = Original cost of acquisition * (CII of the year of sale/CII of year of purchase)
CII Index
Year : 2017-18 - 272
Year : 20-21 - 317
In the example mentioned above,
the indexed cost of acquisition will be
Rs. 11,65,441
i.e., (10,00,000 * 317/272)
Hence, instead of Rs. 3,00,000 your capital gains will now be Rs.1,34,559
i.e. (Rs.13,00,000 – Rs.11,65,441)
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11. Particulars (This calculation is only for the illustrative purpose) Fixed Deposit Debt Funds
Investment (Year of Investment - 2021) Rs. 1 Cr Rs. 1 Cr
Assumed return 6% 6%
Holding Period Rs. 1,19,10,160 Rs. 1,19,10,160
Indexed cost of acquision NA Rs, 1,10,66,176
Taxable Amount Rs. 19,10,160 Rs. 8,43,984
Tax payable (assuming highest tax bracket of invesor)
Rs. 5,73,048
(*tax 30%)
R.s. 1,68,798
(20% tax applocable)
Return after Tax Rs. 13,37,112 Rs. 17,41,363
Fixed Deposit vs Debt Funds
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12. Debt Fund category Return
Past performance may or may not sustain in future
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13. Mutual fund
investments are subject
to market risks, read all
scheme related
documents carefully.
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