Date of Acquisition of Debt MF units:
1st April 2016 (F.Y. 2016 – 2017)
Actual Cost of Acquisition of Debt MF
units: ₹ 1,00,000/-
Indexed Cost of Acquisition = Actual Cost of Acquisition * (CII
of Year of sale / CII of Year of
purchase)
Actual Cost of Acquisition: ₹
1,00,000/-
CII of the year of purchase (F.Y. 2016-17) = 264 (Refer to the
CII chart above)
CII of the Year of sale (F.Y. 2020-2021) = 301 (Refer to the
CII chart above)
Thus, Indexed Cost of Acquisition = 1,00,000 * 301 / 264 = ₹
1,14,015/-
Date of sale of Debt MF units = 31st
March 2021(F.Y. 2020-2021)
Proceeds from selling Debt MF units (Redemption Value) = ₹
1,46,933/-
Total Taxable Capital Gains from the transaction = Redemption Value
– Indexed Cost = ₹ 32,918/-
Since the holding period is greater
than 3 years, the gains are liable for LTCG tax @20%
Thus tax payable on the gains = 20% * ₹32,918 = ₹ 6,584/-
(excludes other statutory levies)
Note: Unlike Bank FDs, Debt MFs enjoy the benefit of deferred
taxation whereby tax liability arises only at the time of liquidation of units.
Thus, after adjusting for LTCG Tax at the end of the five year
period, the net corpus accumulated in the Debt MF = Redemption Value – Tax
Payable = ₹ 1,46,933 – ₹ 6,584 = 1,40,349/-
The Net Annual Yield therefore comes to approximately 7.01%
p.a.
The Debt Fund in this case outperforms the Bank FD by a
substantial amount i.e. ₹ 13,327/-
A Quick Summary of the Returns:
Pre-Tax Returns:
Difference between Bank FD &
Debt MF in terms of Annual Percentage Yield = 1% (in favour of Debt)
Difference between Bank FD &
Debt MF in terms of Accumulated Corpus = ₹ 6,678/- (in favour of Debt)
Debt MF outperforms Bank FD by a modest amount …
Post-Tax Returns:
Difference between Bank FD &
Debt MF in terms of Annual Percentage Yield = 2.11% (in favour of Debt)
Difference between Bank FD &
Debt MF in terms of Accumulated Corpus = ₹ 13327/- (in favour of Debt)
Debt MF outperforms Bank FD by a substantial amount as compared to
the pre-tax returns…
Conclusion:
When compared at pre-tax levels, the
difference between the two instruments appears to be modest, and hence there
isn’t much to choose between the two. At post-tax levels though, the difference
gets inflated twice over, compared to pre-tax levels, in favour of Debt MF.
It is important to note here that as
the investment tenure gets longer, the outperformance of Debt MFs over Bank FDs
amplifies to a point where it becomes too difficult to look the other way…
INDEXATION is what makes the difference here... With higher tax
efficiency, INDEXATION helps you leverage the potential of your Debt MF
Investments… thus playing THE REAL GAME CHANGER.
Therefore, for individuals in the
highest tax bracket (as in this case), Bank FDs could prove to be very
inefficient, in comparison to Debt MFs. In fact even at lower tax slabs, it
would be prudent to check how each instrument fares under different taxation scenarios,
before making your final choice.
Note: The comparison made here is limited
to evaluating the pre and post-tax returns of the two instruments in
consideration. With Bank FDs, one may not have much to evaluate before making a
choice. With debt funds though, in
addition to post-tax returns, the choice will depend on other aspects too such
as credit risk, interest rate risk / duration, pedigree of the fund, size of
the fund / liquidity, and a host of other qualitative as well as quantitative
factors.