Mutual funds: Dividends, long-term capital gains on ELSS are tax-free

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Updated: April 21, 2015 8:34:14 AM

Fixed-maturity plans (FMPs) typically invest in good rated (AAA & AA rated) corporate debt instruments with tenures matching...

Mutual fund, mutual funds, Fixed maturity plans, fixed deposits, corporate debt instruments, debt funds, FD, tax slabIt is not mandatory to have a demat account to invest in mutual funds, whether it’s through SIP or the lumpsum mode, unless you wish to hold the units in demat form. (Thinkstock)

Will a three-year FMP give higher long-term returns than bank fixed deposits after tax and indexation?
— Pawan Gupta

Fixed-maturity plans (FMPs) typically invest in good rated (AAA & AA rated) corporate debt instruments with tenures matching that of the fund. Depending on the mix of credit quality of the portfolio, the gross yields (pre-expenses & pre-tax) of FMPs would be either close to that of bank fixed deposits or marginally higher. From a taxation perspective, long-term capital gains (holding period of three years and above)  from debt funds, including FMPs, are taxed at 20% with indexation benefit. Interest from FDs would be taxable based on the depositor’s marginal tax rate. Assuming one falls in the highest tax slab (i.e., 30.9%), three-year-and-above FMPs might be more attractive on a post-tax basis. One should also be aware of fund management expenses chargeable in case of mutual funds, including FMPs, which would impact the net return.

How could one subscribe to index funds? What is the minimum holding period?
— Akhil Singhal

Index-linked funds are broadly available on two platforms — as mutual funds and exchange-traded funds. Various AMCs offer index funds and one can subscribe to them like any other mutual fund, i.e., directly from an AMC or through an agent/distributor. Each fund might have different exit load periods wherein an exit load would be chargeable on exit within specified periods. ETFs are also typically created by AMCs, but can be bought and sold on the stock exchange just like a stock, subject to its liquidity. There are various equity and fixed-income index-based ETFs available and, unlike MFs, ETFs don’t have exit-load periods. Trading in ETFs would need to be carried out via a stock broker, or an online trading platform.

Is investment in ELSS  a one-time investment and do I get the tax benefit at all the three stages?
—V Ramanathan

Investments in equity-linked savings scheme (ELSS) can be made in lump  sum or via the SIP mode. Tax benefits would be available only in the financial year in which the investment is made and only on the amount invested in that financial year. Further, since ELSS investments are locked-in for three years, investments made through the SIP mode would result in each SIP getting locked in for a three-year period, starting from the date of the respective SIP.

Additionally, the investment amount is deductible from your gross total income under Section 80C of I-T Act (up to a limit of R150,000 p.a). Since ELSS are classified as equity schemes for taxation purposes, dividends as well as long-term capital gains are tax-free.

Is it compulsory to open a demat account to save in an SIP for my child’s education expenses?
— SP Singh

No, it is not mandatory to have a demat account to invest in MFs, whether it’s through SIP or the lumpsum mode, unless you wish to hold the units in demat form. Demat account for MFs is the same as the one used for investing in shares and, as such, most banks and broking firms should be able to help you.

Do I get extra returns if I invest directly to the fund house instead of going through an agent?
— Ashok Kumar Sen

Expense ratios for direct investments into MFs are lower than those applicable for investments through an agent. For equity MFs, the expense ratios on direct plans would be lower by approximately 50bps to 75bps, whereas for debt MFs, they would be lower by 10bps to 75bps.

Lower expense ratios would translate to higher returns on direct investments vis-à-vis if the same fund were purchased through an agent/distributor. Direct plans are typically meant for large investors like institutions, who can select the appropriate funds and manage their portfolios based on their requirements.

The advantages of investing through an agent include assistance in selecting the right MFs based on your risk profile, investment objectives, investment horizon; providing regular updates and monitoring your portfolio; and reviewing your portfolio and suggesting necessary changes from time-to-time.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India)

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