### Debt Fund – STCG Tax Calculation

POSTED BY ON August 23, 2012 10:18 am COMMENTS (6)

Hello Experts,

I would like to understand the tax calculation in case of debt investments.

Scenario 1

Assuming, I invest 1 lakh in a debt fund today. Let’s say, it grows to Rs.1,10,000/- in next 6 months [in the same FY], and then I partially redeem my investment of Rs.50k.

What will be my tax liability at the end of FY and what amount should I fill in “income from other sources” while filing returns?

Scenario 2

I invest in FD a sum of Rs.1 lakh for 5 years. Which is set to become Rs.1,20,000/- assumingly.

Option A – Should I wait for the 5th year to declare my “other source” as 20k, which would be added to my taxable income and taxed at my current slab.

Option B – Is there an option that each year, I declare an earned income (which is not actually earned/redeem), so that my net-tax-outgoing stays less when compared to Option-A.

I hope I was able to explain the scenarios.

Waiting for a response.

Kapil Malhotra

## 6 replies on this article “Debt Fund – STCG Tax Calculation”

1. Mukul says:

For debt funds if I invest for more than 3 years but opt for Quarterly dividend, what is my income tax liability on those dividends? Assume dividends are being paid every quarter for 3 years.

1. No tax is to be paid by investor in dividends they receive

2. Kapil says:

Thanks Ashal and Bemoneyaware!!

I am not sure how to select a best answer out of them 🙂

1. Dear Kapil, I have no issue if you select dear Bemoneyaware’s reply as the best one. The thing which is important to me is – you should be able to learn for yourself.

Thanks

Ashal

3. bemoneyaware says:

Kapil,
1. Debt Mutual Fund
Computation of capital gains for Debt Mutual Funds are classified as
Long Term Capital Gain If Period of holding is more than an year .
Short Term Capital Gain If Period of holding is less than 1 year
Short Term Capital Gains are Added to income and taxed as per tax slab.
Bemoneyaware Capital Gain Calculator can help you find long/short term capital gain based on period of holding and type of asset.

2.Tax on Fixed Deposit
As interest income from Fixed Deposit is Income from other sources you can choose method of accounting – cash or mercantile (accrual)

Under the mercantile (accrual) method, incomes and expenses are taken into account as and when there arises a “right to receive” or “right to pay”.
Under the cash method, incomes and expenses are taken into account on actual receipt or payment.
These methods are explained in detail in Methods of accounting: Mercantile and Cash
In case of Fixed Deposit spanning multiple years thumb rule is:
if interest in a financial year is more than Rs 10,000 then bank will deduct TDS at the rate of 10%. It will show up in Form 26AS. Then in that case u should account for interest income in the same year.
If no TDS is deducted then you have an option of accounting for interest income every financial year or at end of maturity period. If you pay at the end of maturity period then as interest from FD is taxed as per your income slab you need to take care of
a)income slab range
b) would your income slab change by the time of maturity.

FAQ on Tax and Fixed Deposits talks in detail about the taxation of Fixed Deposit.

4. Dear Kapil, Here are the answers.

Scenario 1
The gains from the MF ‘ll be classified as STCG & ‘ll be taxed at your slab rate. The gains ‘ll be reported under thwe head Capital Gains & not in income from other sources. To calculate the exact amount of gains, you w’d have to calculate it this way –

(Difference in sell price NAV – Purchase price NAV)*No. of units sold = your STCG

Scenario 2
Please ask your bank to provide break up of interest accumulated in each FY & declare this interest & pay tax accordingly i.e. option B.

Thanks

Ashal

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