Calculating capital gains in a debt mutual fund is not as tricky as it sounds. How?

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Published: July 9, 2018 1:37:57 PM

Debt fund is an investment pool, such as some types of mutual funds or exchange-traded funds. The capital gain on the debt depends on the plan opted. Calculating capital gains in debt fund is easier because it gives a fixed income.

Financial express Debt mutual funds are a useful tool for those who are not willing to take high risks, yet aim for a capital protection.

Debt fund is an investment pool, such as some types of mutual funds or exchange-traded funds, in which the core holding is in fixed income investments like corporate bonds, Treasury bills, government securities, to name a few. When you invest in a debt fund, you give a loan to the issuing entity. One earns through the debt fund in the form of interest and capital appreciation. Debt mutual funds are a useful tool for those who are not willing to take high risks, yet aim for a capital protection. It offers a steady return and there has been a pattern in the past where people are moving to debt mutual funds from fixed deposits for a better return.

The capital gain on the debt fund

The capital gain on the debt fund depends on the plan you have opted for. Whether it is a growth or dividend fund, when you subtract initial investment from current sale or redemption value, you estimate your capital gains. It is important to know the amount of gain in a debt fund irrespective of the fact that you want to redeem or sale. Calculation of debt fund capital gain is easier because it gives a fixed income.

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What shall you do if you do not know your fund statement?

Retrieve your fund statement using your folio number to check if it is a growth debt fund or dividend fund. Dividend option allows you to receive the dividend on a recurring basis. The mutual fund pays you the dividend after deducting the dividend distribution tax (DDT). The Net Asset Value of a unit of a mutual fund drops which is the intrinsic value of the fund. Since the NAV drops, the capital gains will be a lot less in a dividend plan.

Calculating Capital Gains

The impact of tax depends on the period you choose to keep the fund with yourself. You need to count the number of days from the day of purchase to the day of sale or redemption. If the investment tenure is less than three years, then it is a short-term capital gain. For holdings above three years, it becomes a long-term capital gain.

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The benefit of indexation (using indexation index to determine the cost of acquisition) is available in the case of a long-term capital asset. This indexation is nothing but an adjustment against inflation. This indexation is done by multiplying cost inflation index (CII) of the year of sale and dividing it by CII of the year of purchase. The long-term tax liability is 20% of the gain amount calculated.

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