Are you paying Income tax on Interest Income?

As part of direct taxes, all of us are paying Income tax to Government of India. Income tax is levied on following two parts of income:

1. Earned income which is earned by us in a financial year(Apr to Mar)
2. And the interest income which gets accrued on our savings / investments

There is hardly any scope to save income tax on earned income beyond what is available as part of deductions in different sections of Income tax Act e.g section 80 C, 80 D etc

But how much Income tax we pay on our interest income depends entirely on us. Most of our money either keeps lying in Saving Bank Account(SBA) or Bank FDs and we land up paying almost 31% of interest income as Income tax. 

So is there any way out?

Instead of keeping surplus money in Saving Bank Account or Bank FDs, we may like to invest this money in debt mutual funds. There is no tax liability as long as you remain invested in debt mutual funds(no TDS). If you remain invested for at least three years, you qualify for long term capital gains (LTCG). Should there be any requirement for redemption after three years, you get tax advantage on LTCG due to indexation and flat tax rate of 20%. Effective tax rate works out to be approx 8-9 % for people in 30% tax bracket.

let’s understand through an example. Let us assume we invested Rs 1 Lakh for 3 years and 1 day in a short duration debt fund in FY 2014 – 15 and redeemed in FY 2017 – 18. Assuming annualized pre-tax return was 7% compounded for these three years, tax calculations would be as shown below:  

In case of Bank FD, tax liability would have been Rs 6751/- assuming same rate of interest thus saving almost 73% on taxation.

And  on top of it, you get better returns on debt mutual funds as compared to SBA / Bank FDs.

Think over it…

Goal Based Investments

With Nifty benchmark indices NIFTY 50 in correction mode for almost a month now, we are witnessing gains in our equity based portfolios getting eroded substantially, more so in mid and small cap. Nifty benchmark index has fallen almost 9% from its recent high and Mid & Small cap index has lost 28% and 44% respectively from their all time high made in Jan 2018.

Although it does create apprehensions and some sort of panic in the mind towards future outlook of our investments, it should not worry us especially if we are into Goal Based Investments. So what is this concept of Goal Based Investments?

When we begin our journey towards savings and investments, there has to be some future purpose of these investments, some events like Children’s Education, their Marriages, Retirement Planning etc which we want to finance in future by sacrificing our today’s spending. Let’s call these as future goals which we want to achieve through our investments over the available time horizon. Investment without a goal is like boarding a train without knowing the destination.

Hence Goal Based Investments allow us to invest towards achieving the desired goals in the available time horizon by choosing the correct asset allocation(equity, debt, mix of both, gold) with optimum risk through a Systematic Investment Plan.

A few of the behavioral and financial reasons for choosing goal based investments are :

1. Optimum Savings. Once the goals are decided well in advance, we know how much money needs to be saved regularly, nothing more nothing less.

2. Start Saving Early to get More. Sooner we start saving towards a goal, lesser savings would be required due to power of compounding. e.g If a child’s education requires 50 lac after 20 years, we need to save only Rs 5,500 pm if we start today as against an amount of Rs 10,600 pm if we start after 5 years  and Rs 22,500 pm if we start after 10 years (Assuming 12% return P.A.).

3. Tangible Outcome. We are more likely to save and invest towards achieving a definite goal rather than saving without a purpose.

4. Avoids Debt and Better Management of Assets and liabilities. By mapping tomorrow’s liabilities with assets of today, we avoid getting into debt trap. It also helps us in better budgeting thereby meaning how much we can afford to spend today as against how much we want to spend.

5. Optimum Returns. Goal based investment gives us the opportunity to match our time horizon with asset allocation by taking optimum risk. If there is a mismatch in allocation, we may save too much or too little, missing out on returns with conservative allocation or missing out on goals with too much of risk.

Goal based investments provide us with an opportunity to work towards achieving our future goals rather than chasing returns and give us  peace of mind during such turbulent and volatile market conditions.
Happy Investing!!

Are your Investments in Debt Mutual Funds at Risk?


When we plan out the investments across different asset classes keeping in view the risk profile and financial goals of an investor, invariably part of the investments go in the debt mutual funds. How much of it will get invested in debt funds depends on risk appetite and  time available to achieve desired financial goals. It is supposed to be almost risk free investment giving better returns than bank FD with tax advantage. (https://letsinvestwisely.com/are-you-paying-income-tax-on-interest-income/)

However, in last almost 9 to 10 months, ever since ILF&S first defaulted on its credit payment( both on interest as well as principal), lot many companies like DHFL, ADAG group companies etc have defaulted on credit payment thus making rating agencies like CRISIL, CARE  down grade their ratings on Non convertible debuntures (NCD), Commercial Papers(CP) etc.

So what is the effect of this on the NAV of those mutual fund schemes who had investments in debt instruments of these companies?

As per the SEBI directions , any  BBB-  and downward ratings by rating agencies, mutual fund schemes having investments in thesecompany’s debt paper will have to compulsorily mark down the NAV by 75% to 100% of their total investments in that company as part of mark to market losses.

In last few months, you may have noticed that NAV of quite a number of debt mutual fund schemes had to be marked down, in some cases quite heavily.

So what does it mean to us? Should we stop investments in debt mutual fund schemes?  Definitely NO.

The answer lies in selecting good debt mutual fund schemes having investments in Govt / PSU / top quality companies with only highest ratings of AAA(for long duration debt paper) / A1+( for short duration debt instruments). One must ensure that choosen debt mutual fund scheme has 100% investments  in AAA / A1+ rated companies only. One should take out some time and review existing investments in debt mutual fund schemes and take a call accordingly.

It is important and beneficial to invest in debt mutual funds especially in today’s environment where interest rate cycle is going southward( beneficial for debt market) and equity market is poised for big correction, in fact the broader stock market(equity) is already down heavily in last almost eighteen months, Nifty Mid cap 400 and Nifty small cap 250 bench mark indices have already corrected by 20% and 30.33% from their 52 weeks high respectively.