Investment is Debt Mutual Funds normally offers relatively higher income, better liquidity (exit load applicable in certain cases) and a host of other benefits for small retail investors. These are as under
The tax rules for debt funds were changed in the last year’s budget. The minimum tenure for long-term capital gains was extended from one to three years. This means long term gain from mutual fund will only arise if the minimum investment holding period is 3 years; else it shall be treated as Short Term Cap Gain. For a long term investor, interest income earned from Fixed Deposit is taxed as per respective tax slab of the taxpayer. However, if he invests in Debt MFs, the LTCG is taxed @20% after indexation. Indexation takes care of inflation for each of the years and thus reduces LTCG tax considerably.
Interest income earned from Bank FDs is normally subject to a TDS @ 10.3%, if the interest income earned is more than Rs. 10000 a year. However, there is no TDS on income earned from Debt MFs. Tax timing also differs in both these instruments. Money is received from Bank FD, only when it matures (which may take years, depending upon investment horizon); however, the tax payer is supposed to pay tax each year on the income earned on FDs, even though cash has not been received. In Debt MFs thankfully, the investor needs to pay tax only at the time of redemption and not each year.
The gain from a debt fund is Capital Gain in nature and thus it can be set off against short-term and long-term capital losses which one may have suffered in other investments.
Returns from MFs are market dependent and they do not offer any assured return like Bank FDs. Short-term bonds are not very volatile and give returns roughly equivalent to the prevailing interest rate. However, long term bonds are more sensitive to changes in interest rates. If interest rates decline, the value of bonds in their portfolio shoots up, leading to capital gains for the investor and vice-versa.
For somebody who wants regular retirement income from investments, he/she should invest in a debt fund and start a systematic withdrawal plan. Every month a fixed sum will be redeemed from your investment.