Income Tax Implications of Bank FDs Vs Mutual Funds

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When it comes to investment you will opt for fixed deposits due to risk free. We compare rate of return and risk factors connected with investment opportunities.  In the article, we will discuss about Taxability of Mutual funds and Bank FD. And tax implication differs for equity and debt funds.

Here is some point’s feature between two investment avenues.

Interest rates of bank Fixed deposits are most popular savings instruments due to guaranteed interest rate. You have premature closure of bank FDs is also allowed on levy of penalty. Therefore, many investors are exploring various investment avenues looking for better returns.

Investments in mutual funds can be optimized by having proper understanding of tax implication.

Your decisions are guided not only by benefits for particular financial product offers but also by current tax provisions. Like any other financial product, there are tax implications of investing in mutual fund schemes too. Various types of mutual fund schemes have different tax terms. Also, tenure of investment is important factor when deciding upon tax liability.

Therefore, we must have proper understanding of relevant tax terms to help us plan our investments in better manner. There are various types of MF schemes available in the market. You can invest in any MF scheme depending upon your risk profile and financial profile. However, we often get confused about tax liability on MF return which we receive.

Check Tax on bond funds for long term capital gains

Tax Implications of Investment in Mutual Funds

Mutual fund scheme that invest 65 per cent or more of its portfolio in equities for tax purposes is consider equity funds. If balanced fund invest 65 per cent in equities for tax purpose then it is consider an equity fund. If any equity mutual fund gain units are held for more than 12 months is consider as long-term capital gain. There is no tax on long-term capital gains from equity funds.

For less periods short term capital gains tax is applicable at 15 per cent on gains from equity funds. Many of us opt for dividend option while investing in equity mutual funds. Dividend income from equity mutual funds is tax-free. So gold exchange traded funds, or Gold ETFs, are not treated as equity funds for taxation.

Taxation on Interest Income

Debt funds investments are long term only if they are held for more than three years. Now, long-term capital gain on debt funds is taxed at 20 per cent rate. However, you get benefit of indexation on your original debt fund investment. This means that original funds is adjusted for price rises and taxed accordingly. Since original cost will go up and long term capital gains tax comes to small levels.

But debt funds are use or sold before three years then short term gains are taxed according as per your tax slab. Income from debt funds also come in form of dividends. Any dividend declared by debt mutual fund is exempt from tax. However, mutual fund houses pay dividend distribution tax @ rate of 28.84 per cent before hand over dividends to you.

Bank Fixed Deposits tax implications

However, interest earned from bank fixed deposits is fully taxable unlike savings bank account. You will get income tax exemption on interest earned up to Rs.10, 000 year.  This interest on fixed deposits is added along with other income. And you have to pay tax on that income at an interest rate applicable to you.

In case of bank fixed deposits, banks will deduct tax at TDS at rate of 10 per cent if interest income is more than Rs.10, 000 for year. TDS is calculated by checking all branches interest income of particular bank.

Also see How to become Crorepati in Equity mutual funds

If you are not in tax bracket are advised to furnish form 15G/15H to avoid getting TDS deducted by bank. If you fail to do so then you need to claim tax refund by filing your income tax return. Banks issue TDS credit certificate for tax deducting.  You can claim this as refund, if applicable while filing your tax return.

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