Tax rules for mutual funds
A 54-year-old NRI returning to India wants to invest his remaining Rs 50 lakh corpus in multi-asset and balanced advantage funds to generate steady monthly income. With major tax rule changes and tight income thresholds for rebates, Ask Wallet Wise decodes why choosing between dividend payout and reinvestment options requires careful planning.
Moneycontrol’s Ask Wallet Wise initiative offers expert advice on matters of personal finance and money. You can email your queries to askwalletwise@nw18.com, and we will try and get a top financial expert to address your queries.
I am a 54-year-old NRI returning to India. After meeting all my family commitments such as my children’s education and marriage expenses, I am left with only Rs 50 lakh to meet my expenses for the rest of my life. I am not in a position to work and earn any further. I have my own house and adequate health insurance. Since I live in a village-like area, my current monthly expenses for myself and my wife are around Rs 20,000 to Rs 25,000.
From my current corpus, I am considering investing in mutual funds specifically multi-asset and balanced advantage funds in a 50:50 ratio using the IDCW option for monthly withdrawals, so that I can avoid tax, as income up to Rs 12 lakh is tax-free under the new regime. Is this a good idea? If yes, should I opt for a monthly dividend payout or the reinvestment option?
Expert’s Advice: The capital gains taxation framework has undergone major changes over the past two years. The benefit of indexation has now been practically withdrawn, and taxation of non-equity mutual fund schemes has also changed significantly.
For investments made in debt funds on or after 23 July 2024, profits regardless of holding period are treated as short-term capital gains and taxed at your slab rate. Any scheme with 65% or more in debt instruments is treated as a debt scheme.
Units of equity-oriented schemes held for more than 12 months are taxed at 12.50% as long-term capital gains, after the initial Rs 1.25 lakh of gains which are tax-free. If sold within 12 months, gains are taxed at 20%. Any scheme that invests 65% or more in shares of listed Indian companies is considered an equity-oriented scheme. Schemes that are neither debt nor equity schemes are taxed at 12.50% if held for more than 24 months, and at slab rate if held for a shorter period.
Under the new tax regime, an individual does not pay tax on income taxed at slab rate if total income does not exceed Rs 12 lakh, due to the Section 87A rebate. However, long-term capital gains taxed at 12.50% or 20% do not qualify for this rebate. While dividends under IDCW will remain tax-free for you if your normal income stays within Rs 12 lakh, you will have to pay tax on long-term capital gains when you redeem units of multi-asset or balanced advantage funds, since these categories are neither debt nor equity schemes. As a result, their entire long-term capital gains will be taxed at 12.50%.
Story continues below Advertisement
If you opt for the old tax regime and your total income including all capital gains (taxed at slab or special rate) does not exceed Rs 5 lakh you are eligible for a full Section 87A rebate. The only exception is the tax on long-term capital gains from equity-oriented schemes.
Since your annual income is unlikely to exceed Rs 5 lakh, and you do not intend to invest in equity-oriented schemes, you will not have any tax liability on dividends or long-term capital gains from the two categories of funds you plan to invest in. Therefore, the old tax regime appears more beneficial for you.
Given your need for regular income to meet daily expenses, you should opt for the dividend payout (IDCW payout) option rather than the reinvestment option.
Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.