Debt and Liquid funds

#1
I have been looking at various different types of debt funds & it thoroughly confuses me.

My tax bracket is in the 30% slab & I want to figure out what's best for me.

- Liquid Funds
- Liquid Plus Funds
- Other kinds of debt funds.

In each of these, is it better for me to go for growth option or dividend option or dividend reinvestment option?

If dividend re-investment option, is daily dividend reinvestment better or weekly or monthly or whatever?


Can anyone explain the tax repurcusions for all different options for someone in the 30% slab

- Liquid funds invested in Growth option sold within 1 year
- Liquid funds invested in Growth option sold after 1 year
- Liquid funds invested in Dividend option sold within 1 year
- Liquid funds invested in Dividend option sold after 1 year
- Non Liquid debt funds invested in Growth option sold within 1 year
- Non Liquid debt funds invested in Growth option sold after 1 year
- Non Liquid debt funds invested in Dividend option sold within 1 year
- Non Liquid debt invested in Dividend option sold after 1 year
- Any other combination.

Does the dividend option mean that the dividend will be re-invested automatically or does it mean it will be paid regularly? In either case, does the tax stuff change?
 

nikrod

Active Member
#2
I have been looking at various different types of debt funds & it thoroughly confuses me.

My tax bracket is in the 30% slab & I want to figure out what's best for me.

- Liquid Funds
- Liquid Plus Funds
- Other kinds of debt funds.
Please note that Liquid & Liquid+ funds are used to park short term cash. They are preferred cxhoice over bank savings account. For this purpose you can go with Liquid Plus funds since they offer better tax benefits.

In each of these, is it better for me to go for growth option or dividend option or dividend reinvestment option?
For your tax bracket it would be better to go with dividend option if you are planning to hold for less than a year. Otherwise go for Growth.

If dividend re-investment option, is daily dividend reinvestment better or weekly or monthly or whatever?
There should not be much difference if you hold investment for few months.

Can anyone explain the tax repurcusions for all different options for someone in the 30% slab

- Liquid funds invested in Growth option sold within 1 year
- Liquid funds invested in Growth option sold after 1 year
- Liquid funds invested in Dividend option sold within 1 year
- Liquid funds invested in Dividend option sold after 1 year
- Non Liquid debt funds invested in Growth option sold within 1 year
- Non Liquid debt funds invested in Growth option sold after 1 year
- Non Liquid debt funds invested in Dividend option sold within 1 year
- Non Liquid debt invested in Dividend option sold after 1 year
- Any other combination.

Does the dividend option mean that the dividend will be re-invested automatically or does it mean it will be paid regularly? In either case, does the tax stuff change
Dividend option means dividend will be paid. Dividend reinvestment option is different.

I would further note that with effect from Apr 1, 2011, Direct Tax Code will be in effect. It would change the current tax treatment. Hence I would advice you to go for dividend option of Liquid+ schemes for now. Adter DTC is implemeted, the tax treatment will decide the choices.
 
#3
Please note that Liquid & Liquid+ funds are used to park short term cash. They are preferred cxhoice over bank savings account. For this purpose you can go with Liquid Plus funds since they offer better tax benefits.
For amounts I want to hold for 12-15 months, what is better - should I look at Liquid Plus funds or other kinds of debt funds.


For your tax bracket it would be better to go with dividend option if you are planning to hold for less than a year. Otherwise go for Growth.
Could you elaborate on what is the difference in the two from a tax perspective?




I would further note that with effect from Apr 1, 2011, Direct Tax Code will be in effect. It would change the current tax treatment. Hence I would advice you to go for dividend option of Liquid+ schemes for now. Adter DTC is implemeted, the tax treatment will decide the choices.
What are the changes going to happen in DTC with respect to Debt funds?
 

nikrod

Active Member
#5
For amounts I want to hold for 12-15 months, what is better - should I look at Liquid Plus funds or other kinds of debt funds.
You can consider short term debt funds. Go to following link and select Debt: Short Term funds with 2-3 year perrformance. I'll give you best performing funds.

http://new.valueresearchonline.com/funds/default.asp

Also check following link. You can consider 5 & 4 star rated funds

http://new.valueresearchonline.com/funds/h2_typecomp.asp?type=1&objective=22

Could you elaborate on what is the difference in the two from a tax perspective?
The dividend distribution tax for debt funds currently works out to be 14.16% ((12.5% + 10% service tax + 3% edu cess). So people with 20 & 30% tax bracket will benefit from Dividend option of debt funds. People in 10% bracket should better go for growth option. These tax rules are subject to change with onset of DST.



What are the changes going to happen in DTC with respect to Debt funds?
As for this, I myself am yet to get clarity. Will keep this forum posted when I do.
 
#6
The dividend distribution tax for debt funds currently works out to be 14.16% ((12.5% + 10% service tax + 3% edu cess). So people with 20 & 30% tax bracket will benefit from Dividend option of debt funds. People in 10% bracket should better go for growth option. These tax rules are subject to change with onset of DST.
Thank you, Nikrod, for all your replies.

For a 30% tax bracket person who goes for the growth option. What is the tax % he would pay if he sells the fund before a year and after a year.
 

nikrod

Active Member
#7
Thank you, Nikrod, for all your replies.

For a 30% tax bracket person who goes for the growth option. What is the tax % he would pay if he sells the fund before a year and after a year.
as per the current tax laws, if debt fundis sold after a year, tax applicable is 20% with indexation benefit OR 10% flat.
 

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