Mutual Funds vs Fixed Deposit – Which one is more Tax efficient.
Fixed Deposit
Taxation as per slab rate
42.7%: assumed highest tax bracket with no surcharge
Debt Mutual Fund
Short Term Capital Gain
Long Term Capital Gain
Taxation at lower rate with indexation benefit
28.5%: assuming highest surcharge rate applicable
Fixed Deposit
Debt Mutual Fund
Short Term Capital Gain
Long Term Capital Gain
Taxation as per slab rate
42.7%: assumed highest tax bracket with no surcharge
Taxation at lower rate with indexation benefit
28.5%: assuming highest surcharge rate applicable
Post Tax Returns for Holding Period > 3 Years (Assuming Nil Surcharge)
Post Tax returns calculation for investment of Rs.10 lac with 6% pre-tax return over 3 years holding period assuming investor falls in highest tax bracket with no surcharge applicable
YEAR 1 Particular Debt Mutual Fund Fixed Deposit Investment 10,00,000 10,00,000 Returns Returns @6% 60,000 60,000 Less-Tax 0 -18,720# Net returns 60,000 34,356 Closing value 10,60,000 10,41,280
YEAR 2 Particular Debt Mutual Fund Fixed Deposit Opening value 10,60,000 10,41,280 Returns Returns @6% 63,600 62,477 Less- Tax 0 -19,493# Net returns 63,600 42,984 Closing value 11,23,600 10,84,264
YEAR 3 Particular Debt Mutual Fund Fixed Deposit Opening value 11,23,600 10,82,264 Returns Returns @6% 47,416 65,056 Less- Tax -6,945 -20,297# Net returns 60,471 44,758 Closing value 11,84,071 11,29,022
Long Term Capital Gain(LTCG) Calculation
Particular Amount Sales Price in year 3 (Opening Value+ return)(A) 11,91,016 Index cost of Acquisation(B)@ 11,97,625 LTCG(A-B) 33,391 Tax On LTCG @ 20.8% 6,945
POST TAX RETURNS 5.79% 4.135
@ indexed cost of indexation is arrived by compounding initial
investment with assumed inflation @ 5% p.a for 3years;
# assuming taxation of FD at @ 31.2%
@ indexed cost of indexation is arrived by compounding initial
investment with assumed inflation @ 5% p.a for 3years;
# assuming taxation of FD at @ 31.2%
As you may observe from the above that Mutual Funds have higher post tax return over fixed deposits despite having same pre-tax return of 6% in both cases. In addition to this, advantage of partial redemption, sets off with losses in equity market is also available.
Debt Mutual Funds have edge over fixed deposits due to Long term capital gain taxation. So if you are in higher Income Tax bracket, it make sense to opt for debt mutual funds.
CA Mukesh Gupta
Mukesh Gupta is the founder and director of Wealthcare. He is
Fellow chartered accountant, Certified Financial Planner and
Certified Public Financial advisor. He is in financial services
industry since 1994. He conducts free money management sessions for corporates and associations on topics related to Personal finance. His previous engagement was with Birla Sunlife group. He regularly writes on topics related to Personal finance and occasionally appear on electronic media.
