Last weekend I thought of doing a
FD and was checking with various corporate FD and Bank FDs
What I found DHFL corporate FD for
40 months is giving 10.10% interest. But I had a mixed experience with
FDs because last time when I did FD with HDFC ltd, though I did with high
interest rate of 10.50%, I got minimal return because of taxation.
This time I did not want to repeat
the same mistake. So I was checking what are other avenues where post tax
return for me would be better than these high interest rate FDs.
I found debt funds are better than
bank FDs in long run for post-tax return.
Now question arises how? J
Before understanding we need to
understand Cost Inflation Index(CII)
What is CII?
It is used for calculating long term capital
gain from income tax act section 48
CBDT has notified the Cost
Inflation Index (CII) for Financial Year 2014-15. Complete Notification is
Given Below.
SECTION 48, EXPLANATION (v) OF THE
INCOME-TAX ACT, 1961 - CAPITAL GAINS - COMPUTATION OF - NOTIFIED COST INFLATION
INDEX FOR FINANCIAL YEAR 2014-15
NOTIFICATION NO. 31/2014 [F. NO.
142/3/2014-TPL], DATED 11-6-2014
In exercise of the powers conferred
by clause (v) of the Explanation to section 48 of the Income-tax Act, 1961 (42
of 1961), the Central Government hereby makes the following amendment in the
notification of the Government of India in the Ministry of Finance (Department
of Revenue), Central Board of Direct Taxes published in the Gazette of India,
Extraordinary, vide number S.O. 709(E), dated the 20th August, 1998,
namely:--2. In the said notification, in the Table, after serial number 33 and
the entries relating thereto, the following serial number and entries shall be
inserted, namely:--
Sl.
No.
Financial
Year
Cost Inflation Index
(1)
(2)
(3)
"34
2014-15
1024"
Cost Inflation is required to
calculate Long term capital gain under Income Tax Act. Long Term Capital Gains
is computed as below: -
LTCG = Full value of consideration
received or accruing - (indexed cost of acquisition + indexed cost of
improvement + cost of transfer)
Where,
Indexed cost of acquisition =Cost
of acquisition x CII of year of transfer /CII of year of acquisition
Indexed cost of improvement =Cost
of improvement x CII of year of transfer /CII of year of improvement
CII = Cost Inflation Index (Please
see chart given below)
Tax liability on LTCG to be taken
at 20%.
If total income other than LTCG is
less than zero slabs, LTCG over the zero slabs only attracts tax at 20%.
Cost inflation Index for Financial Year 1981-82 to 2014-15
is given below for your ready reference.
FINANCIALYEAR
|
COST INFLATION INDEX
|
2014-15
|
1024
|
2013-14
|
939
|
2012-13
|
852
|
2011-12
|
785
|
2010-2011
|
711
|
2009-2010
|
632
|
2008-2009
|
582
|
2007-2008
|
551
|
2006-2007
|
519
|
2005-2006
|
497
|
2004-2005
|
480
|
2003-2004
|
463
|
2002-2003
|
447
|
2001-2002
|
426
|
2000-2001
|
406
|
1999-2000
|
389
|
1998-1999
|
351
|
1997-1998
|
331
|
1996-1997
|
305
|
1995-1996
|
281
|
1994-1995
|
259
|
1993-1994
|
244
|
1992-1993
|
223
|
1991-1992
|
199
|
1990-1991
|
182
|
1989-1990
|
172
|
1988-1989
|
161
|
1987-1988
|
150
|
1986-1987
|
140
|
1985-1986
|
133
|
1984-1985
|
125
|
1983-1984
|
116
|
1982-1983
|
109
|
1981-1982
|
100
|
If you do not understand the above big explanation don’t worry,
let me simplify in layman’s language.
The FDs whatever we get, at the end
of each year compounding happened after TDS deduction. However in case of debt
fund each year TDS will not be deducted. However at the end of the 3rd year
if you withdraw, you can pay income tax in either of below 2 ways:
·
Directly 10% on tax without
indexation
·
Give TAX after indexation
calculation
Suppose you made a deposit of 1lakh in both 10% FD and in debt fund:
Suppose you did a Bank FD with 10 %
Interest
|
Suppose you bought a debt fund
mutual fund whose return is 10%
|
|||||
Year
|
Interest earned
|
TDS deducted
|
Money left after TDS deduction that
year
|
Interest earned
|
TDS deducted
|
Money left after TDS deduction that year
|
2012-13
|
10,000
|
1000
|
109,000
|
10,000
|
0
|
110,000
|
2013-14
|
10,900
|
1090
|
118,810
|
11,000
|
0
|
121,000
|
2014-15
|
11,881
|
1188
|
129,503
|
12,100
|
0
|
133,100
|
Without indexation if you pay tax
you need to pay tax (133100 - 110000)*(10/100) = 2310
With indexation the tax amount
would be as below:
Indexed purchase price = Original
purchase price * (CII for 2014-15 / CII for 2012-13)
My Indexed Purchase Cost of
1lakh is: 1,00,000*(1024/852)= Rs1,20,188/-
My total indexed interest/Profit
would be :Sale Price – Indexed Purchase Price= 1,33,100 – 1,20,188 = Rs12,912/-
I need to pay tax: 12,912*20%=
Rs2582/-
In this case my tax without
indexation is better, hence I will go ahead and pay tax without indexation.
So my net Return on FD would be:
133100 – 2310 =Rs1, 30,790 which is more than bank FD.
Since I am inside 10% tax slab, so
my FD return was 129503.If suppose my tax slab is in 20% , then I need to pay
additional tax post TDS deduction .
So looking at these factors debt
fund returns are better than guaranteed FDs.
However few pointers I would like
to put here:
·
If you are retired and you do not
come under taxation slab then FD would be better.
·
If you really do not want the money
for 3-4 years then debt fund is better. Else if you withdraw before 3 years
then short term capital gain will apply and you will lose more.
·
Debt fund returns are not
guaranteed like FDs. However statistically good rated debt funds will give you
handsome return.
So you can calculate tax using both
ways and then choose the one which is lower. J
Indexation gives a lot of benefit
as one can have a virtually tax fee income if invested for a longer duration
during days of high inflation.
NOTE: This blog has been written with a lot of care. The author
is not a CA. If any error found please let me know. The opinions expressed
above are only the views of the author, and not a recommendation to buy or
sell. The author does not accept any liability whatsoever arising from the use
of any of the above contents
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