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How Are Debt Mutual Funds Taxed - A Complete Guide

How Are Debt Mutual Funds Taxed
by 5paisa Research Team 26/10/2021

Watching the NAV skyrocket and earning a lot of profits on your mutual fund investments surely feels euphoric until the obvious strikes you during redemption - you got to give away a part of it as taxes. (Ouch!)

With Equity Mutual Funds, you still could dodge some of the tax burden (Flat 1 lakh rupees exemption is given every year) if you had been holding the units for more than a year. But when it comes to Debt Oriented Mutual Funds, there really is no way around it. That does not mean you cannot strategise your redemptions to dial down the taxes a few notches and optimise your overall returns.

We are here to decode the tax implications and help you make wise choices.

But before that, you must be certain that what you are holding is indeed a Debt Mutual Fund.


What qualifies as a Debt Oriented Mutual Fund?

Most often, the term 'Debt Fund' would be written in the title of the scheme itself. Yet in the case of some schemes, including the hybrid ones, it might not be so obvious. In any case, the sure-shot way to find out if your investment is a Debt Mutual Fund is to check the fund's holdings.

If the portfolio of the fund predominately consists of holdings in fixed income securities like corporate and government bonds, treasury bills, debt instruments and money market securities, it is a Debt Fund. In most digital trading platforms, you will also be given a graphical representation of your scheme's asset allocation in terms of debt and equity. A hybrid fund would qualify as a Debt Fund if the fund manager has invested more than 65% of the total assets in the debt instruments that we just mentioned above. 



How are these Debt Funds taxed?

You can earn up to two types of incomes on your Debt Mutual Fund investments depending on the plan you've chosen - Growth or Dividend. Let's delve into each type of income and its taxation.


Taxation of dividend income 

For mutual fund dividends, the taxation is the same for both debt and equity funds. It is simply clubbed with your other income sources and taxed according to the income tax bracket or slab applicable to you.

For example, if you are paying 30% tax on your salary or business income, this dividend income will also attract the same rate. Then again, you could also be someone whose income is below the basic exemption limit, in which case you would not have to shell out any tax money at all. 

A TDS of 10% of the dividend payout will always be deducted if you are receiving in excess of Rs. 5000 in a financial year. Like always, you can claim it against your tax liability during your income tax assessment.


Taxation on Capital Gains

Simply put, capital gains are the profits that you earn from the appreciation in the NAV of your units. Say you had bought 1000 units of a fund when the NAV was 20 per unit. And now, when you are redeeming, the NAV stands at 50 per unit. Considering there is no exit load applicable, you have gained Rs 30 for every 1000 units, and your capital gains add up to 30,000 for the financial year.

Again this capital gain can be long term or short term depending on the time difference of purchase and redemption of units.


Tax On Short Term Capital Gains

Akin to the dividend income, the gains on debt mutual funds units, when sold before 3 years from the initial investment date (STCG), would be classically taxed with your total income. That means you pay taxes as per your applicable slab rate. 

We can say it is beneficial to liquidate your funds before 3 years if you fall in the lower tax slabs or are exempted from income tax altogether.


Tax on Long Term Capital Gains

A longer holding period, as illustrated above, would attract a tax of flat 20% on your gains irrespective of which income tax slab you fall into. To your relief, though, here you can enjoy indexation benefit to calculate your capital gains.

Suppose you had invested when the units were priced at Rs. 100, and you are redeeming them after 10 years when the NAV is Rs. 200. Instead of calculating your gains at Rs. 100 per unit, the purchase price would be adjusted till the year of redemption (of course, that 100 rupee is worth a lot more now!) and revalued as per the CPI Index released by the tax department. This will bring down your profit on paper and consequently the taxes.


Setting off Capital Losses with Gains

In case if you have suffered a loss in one scheme, you can even set it off with the gains from another scheme or any other asset. Such losses or any excess remaining after setting off, can also be carried forward for 8 assessment years to be further set off against gains, provided you file your return within the due date. 

This comes with the catch that you can't set off long term capital loss with short term capital gains. 

Nevertheless, tactfully timing your redemptions to cancel out some profits with the eligible losses can go a long way to ease your tax burdens.

Debt Mutual Fund taxation might discourage you from considering them as a lucrative investment mode, but they are proven to protect your capital and give you stable, consistent returns in the long term. Your total investment portfolio should ideally have a proper allocation between debt and equity assets to bring down the volatility in returns.

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Stocks vs Mutual Funds - Choose Your Right Investment Fit

Stocks vs Mutual Funds
by 5paisa Research Team 26/10/2021

With bank interest rates dwindling year on year and with every investor revelling in the equity market's raging bull run, more and more people are giving shares and mutual funds a whirl. Ironically though, plunging in without having done the groundwork of understanding these modes of investments is a precarious move. So if you have stopped to wonder which one would be the right choice for you, you have taken the first step just right. We are here to guide you on the rest.

Let us first get to the basics.

What are stocks/shares?

Stocks that you can buy and sell in the markets are part-ownership rights that you get in big listed companies. It is like you are contributing capital to these companies for their operations, only instead of loan you are participating as an equity holder. Unlike loans or debentures where there are assured interest payments, here you are exposed to the uncertainty in returns as it all depends upon how the company performs. 

And a Mutual Fund?

Well, you can imagine it as a large pool of money from thousands of retail investors that are then invested by experts (known as fund managers) in several hundred stocks or more. So when you buy a unit of the mutual fund, you are buying a proportionate share of that entire asset class maintained by the fund house. So in a way, you again become part-owner of all those companies that the fund has invested in.

In either case, you are participating as an equity investor, and you bear the risks and rewards that those shares are exposed to. Even then, they largely vary in terms of some features, and you can decide which is more suitable for you based on certain factors and  parameters:


When you are buying a particular stock or a few stocks, you are betting all your money on those few stocks only. There is little to no diversification, and here, you can either earn a lot of profits or end up in losses which exposes you to a lot of volatility. It is true you can cut that risk down if you can ably invest in multiple stocks and diversify your portfolio yourself.

Mutual Funds invest in a huge number of companies across various sectors that have negative correlations, to dilute the risk and optimise the returns. Such a huge level of diversification can rarely be achieved by an individual investor.

Active or Passive Investment Approach

If you are someone who can actively track, rebalance and shuffle your investments, direct stocks can give you higher returns when it is done in a disciplined and systematic manner. But if you cannot afford to invest so much time in researching and managing your portfolio, you should invest in a mutual fund and leave the rest to the experts. Then all you need to do track is your fund's average returns once in a while to avoid losing out on better opportunities.

Risk-Return Tradeoff

With very high growth stocks, you can time the market and get high returns in a short period. The downside is that the risk of the prices going down is equally high.

Mutual Funds have historically given great returns too, but more in the long run, as intense diversification mutes both the risks and returns in the short term.

Investment Amount

Even large-cap mutual funds have NAVs that are affordable for small investors just starting out. But most large-cap and blue-chip shares are relatively expensive, so you cannot diversify well if your investment amount is not sufficient. So if you are a new investor and are considerably risk-averse, a mutual fund might be the right place to begin.

Autonomy Vs Expert knowledge

The funds are managed by experienced fund managers who are well versed with the way of the market. While their rich expertise is an add-on to the other benefits, indeed, here, you do not have any autonomy to choose when and where to invest or divest.

If you are investing, holding and selling stocks yourself, you can have absolute freedom of decision. This is, of course, something that you would like to have if you have the skill and knowledge to gauge the market movements and economic cues.


Since the fund is managing your money by employing expert managers and incurring administration expenses, it is going to charge a commission/consideration from you. An expense ratio is expressed and charged as a percentage of assets managed by that fund.

In direct stock trading, however, you will only have to pay nominal brokerages when you buy and sell. 

Time Horizon

As we discussed earlier, it is possible to earn quick money in very high growth stocks if you are willing to bear a high risk. So if you are looking to achieve a financial goal in the short term, direct stocks might be worth the risk. Nonetheless, value stocks can also give you returns in the longer term.

In mutual fund investment, the returns start to swell only when you stay invested beyond 5-7 years. Equity stocks may give you higher returns in a shorter period but rarely earlier than 3 years.

Tax Savings

In terms of taxation of gains, both stocks and mutual funds enjoy a similar stance. There is no tax benefit in terms of deduction if you invest in direct equities, but ELSS Mutual Funds can save you taxes as they are eligible for deduction under section 80C of the Income Tax Act.

As you can see, both modes of investments have their innate pros and cons, and it is your outlook as an investor that largely matters when making the final choice. But hey, it's not all black and white when it comes to investing, so you can allocate your funds in a ratio that suits your profile and enjoy the best of both worlds.

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Top Pharma Mutual Funds To Invest In 2021

Top Pharma Mutual Funds To Invest In 2021
by 5paisa Research Team 26/10/2021

Ever since the global health crisis has fraught our lives, governments around the world have been increasingly investing in medical infrastructure. The developing nations have been seeing massive inflows of funds from intergovernmental pillar organisations and investors alike. 

The Indian government, too, is expected to spend about 2.5% of its GDP on health infrastructure by the end of 2025. As a consequence of this increasing global health awareness, the pharma sector has seen a quick rebound after the 2020 stock market crash due to the pandemic.

This sector is expected to rally in the near future, and if you are bullish on this sector too, we have come up with a comprehensive analysis on our top 3 picks among the Pharma Mutual Fund Schemes in 2021:

1) Nippon India Pharma Fund Growth

2) Tata India Pharma & Health Care Fund Growth

3) UTI Healthcare Fund Growth

Let's take a deep dive into all the factors, parameters and fund specific data that will help you make the best choice for yourself:


The longer the age of the scheme, and more importantly, the AMC, the surer you can be about its reliability and reputation. A higher age also means a lot of historical data will be available to you for a detailed analysis of its past performance. This doesn't mean you have to steer clear of new schemes as there are a lot of other factors to consider as well.

Asset Under Management

It is the total pool of funds that the fund managers are dealing with, and you could think of it as the fund's current portfolio value. A high AUM signifies that the scheme has amassed a lot of money from the investors and has also grown that amount over the years. It is a telltale sign of investors confidence along with the fund's ability to diversify its holdings.

Expense Ratio

Expressed as a percentage of the investment amount, the expense ratio is a measure of how much money would be charged from you as admin expenses. A higher expense ratio will mean your net returns would be lower. Compared to general funds, thematic funds generally charge a high expense ratio, but the overall returns can still be spectacular.

Asset Allocation

A sectoral or thematic fund can allocate its assets among large-cap, small-cap and medium cap shares which indicates the magnitude of the market capitalisation of the companies. Small companies are riskier to invest in, but they can also give you steep positive returns.

Top Holdings 

A closer look into the companies where the funds have concentrated most of their holdings can give you an insight into their future performance. Ideally, a larger holding percentage in fundamentally strong companies means that no matter the transitory ups and downs the returns should have a great average in the long run.


You must be thinking that this is the concluding factor in choosing the right scheme, but it is crucial to remember that the returns that are available in the records are only indicative of the fund's past performances. You can have a similar projection for the future, but they can always go awry. The smarter way to zero in on the best option is to refrain from giving too much emphasis on returns alone.

You see, there is no clear winner and all 3 of them have given great annualised returns over the life of the funds. Tata India is a comparatively younger fund, which explains why its lifetime returns are lower. In terms of category average returns, all three funds have performed higher than the mean, with the exception of last year, which saw a massive recovery in the markets. 

Since the players in the pharma and healthcare industry are not too many in number, all these Pharma Funds have holdings that substantially overlap with each other. So if you are holding units in two or more of these funds, you cannot really enjoy any diversification benefit. It is also not advisable to put all your money in a sectoral or thematic fund to avoid negative returns in case the industry tumbles due to unforeseeable economic consequences.

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5 Easy Steps to Mutual Fund Redemption & Exit

5 Easy Steps to Mutual Fund Redemption & Exit
by 5paisa Research Team 26/10/2021

Investors in mutual funds may invest and withdraw their money at any time throughout any business day, subject to any lock-in restrictions. Loads and capital gains tax apply to the redemption amount as well.


Investors who have reached their investment have the option of withdrawing their money in a variety of ways. So, if you fall in that ballpark, this post mentioned all the ways and steps that you need to follow for mutual fund redemption & exit.

5 Ways to Exit & Redeem Mutual Funds

Units of mutual funds may be redeemed online or offline. Redeeming mutual fund units may be accomplished in a number of ways, including those listed below:

1. Mutual Fund House Direct Redemption

As long as the lock-in period has not expired and the mutual fund units have been bought through a Mutual Fund House, i.e. the Asset Management Company (AMC), you may immediately connect with them and redeem all or part of your mutual fund units.

To terminate an account, you must redeem every single unit that the account contains. If just some units are redeemed, the account remains open. In addition to the aforementioned redemption procedure being completely online, you may also submit a completed redemption request form in person at the AMC.

After the request has been processed, you will be credited with the redemption amount through NEFT or get a check in the mail at the address you provided at registration.

2. Redemption through an Agent

In the event you invested in mutual funds via an agent, you will also be able to redeem your mutual funds through the same agency.

The agent sends your fully completed form to the AMC, together with information on the plan and folio, as well as the number of units you want to withdraw.

Once the AMC starts the redemption procedure, the money will be deposited into your bank account or a check will be sent to your address on file.

3. Redeeming Mutual Funds Using Certified Third-Party Portals

Some investors purchase mutual funds online via reputable third-party portals like 5paisa, which collaborate with fund houses to provide a wide range of top-rated mutual funds.

Mutual fund redemption requests may also be handled by these portals online, using a more streamlined procedure. The money is credited to your connected bank account as soon as the redemption request submitted via the site is approved.

4. Redemption through Demat Account

Certain individuals choose to invest in mutual funds through an online Demat or trading account. If you purchased mutual funds using a Demat account, you must also redeem them using that account.

A net asset value (NAV) payment against redeemed mutual funds is made electronically and paid immediately to the bank account associated with the Demat account.

5. Redemption through CAMS Website

For investors who want to redeem mutual fund shares from a variety of AMCs, CAMS (Computer Age Management Services) can help.

When a properly filled-out form is sent into the CAMS office, the requested funds are sent to the beneficiary's bank account within 2-4 business days of receiving it. Several AMCs use the CAMS office as a single point of contact for a wide range of services.


What is the Mutual Fund Redemption Timeline?

Once a redemption request has been completed, it cannot be changed or cancelled. So be careful. Once a request is received, it is handled by the NAV of the current business day, especially if it is received before 3 p.m. Unless otherwise specified, the following business day's NAV will be used instead.

3 Reasons Why Investors Might Exit a Mutual Fund

1. An Unexpected Financial Crisis

It's a good idea to keep a portion of your portfolio in open-ended mutual funds just in case anything unexpected happens. Selling off funds that were set up with a specific end in mind is a bad idea.

When redeeming your mutual fund units, keep in mind that there will be tax consequences as well as exit loads. To get the most out of flexible funds, invest over a longer period of time. Capital preservation and growth should always be the primary goals of investment.

2. Low Performance of the Scheme

In the event that your plan has been giving an underwhelming performance for some time, you should investigate the causes of the problem.

If the reason was a shift in your goals or a dramatic change in your portfolio mix, you may want to think about redeeming your fund(s) to get back on track. The recent performance of a fund should not be taken into consideration while redeeming.

In order to maximize their profits, investors should consider holding their investments for as long as feasible.

3. Non-delivery of the Promised fund Performance

Individuals put their money into mutual funds whose goals align with their own. As a result, choosing which funds to include in your investment portfolio depends heavily on the overall goal of the investment.

Active investors who are keeping tabs on the market may decide to sell or redeem their holdings if the outlook is bleak. When investing for the long term, a CRISIL study says that the odds of a fund producing good returns rise.


When it comes to meeting financial investment objectives and building wealth, investing in mutual funds is a long-term solution. However, mutual funds are also adaptable when it comes to how much money you want to put in and how long you want to keep it. It's critical to safeguard one's investment in mutual funds while making such a long-term commitment to wealth development.

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NSE Crosses 5 crore Unique Investors Mark

NSE Crosses 5 crore Unique Investors Mark
by 5paisa Research Team 26/10/2021

In a significant landmark, the National Stock Exchange announced that it had crossed the Rubicon of 5 crore unique investors. This is about 30% lower than the total demat accounts in India at 7 crore. However, that is more because there are scores of investors with multiple demat accounts. The 5 crore unique investors are mapped by PAN numbers.

According to the MD and CEO of NSE, Vikram Limaye, it took the NSE nearly 15 months to go from 3 crore unique investors to 4 crore unique investors. However, the journey from 4 crore unique investors to 5 crore unique investors has happened in just 7 months. Limaye expects the NSE to traverse the next journey to 10 crore unique investors in next 3-4 years.

The NSE has also noted in its press release that the total number of unique client codes registered with the NSE stood at 8.86 crore. While an investors is only allowed to have a single trading account with one broker, they are permitted to have trading accounts with different client codes with multiple brokers.

In the last one year, there has been a tremendous spread of the equity cult in India as is evident from the surge in trading accounts, fresh demat accounts opened and the record number of fresh mutual fund SIP folios opened. This has been underlined by scores of millennials joining the investment mainstream, many of whom are preferring direct equities.

In terms of state level contributions, Maharashtra contributed 17% of the unique investors followed by Uttar Pradesh contributing 10% and Gujarat contributing 7% of the new investors being registered. In fact, the top 10 states have accounted for a full 71% of the total new investors registrations in India via the NSE. 

An interesting trend pointed out by the NSE was that the new client registrations have been largely driven by non-metros. For example, the cities beyond the top-50 cities actually contributed to a whopping 57% of the new client account registrations. This is, perhaps, the first clear indication that the investors were not just growing in numbers but also in terms of a wider geographical spread.

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Bharti Airtel also signs for 4-year moratorium

Bharti Airtel also signs for 4-year moratorium
by 5paisa Research Team 26/10/2021

Almost a week after Vodafone Idea signed up for the 4 year moratorium, Bharti Airtel has also signed up for the moratorium. While Vodafone Idea had only signed up for moratorium on the spectrum dues, Bharti Airtel has signed up with DOT for moratorium on AGR charges and Spectrum Usage Charges (SUC). The last date for signing up was 29-October.

Check - Vodafone opts for 4 Year Moratorium on AGR Charges

In addition, the government has also given the telecom companies an offer by which they would be able to convert the interest portion of the moratorium period into an equity stake and offer it to the government. However, since the telecom companies have 90 days to take a final call on this issue, Bharti Airtel has not committed on this front.

Telecom companies opting for the moratorium on the AGR charges and the spectrum usage charges (SUC) would have to pay interest to the government at the rate of 2% above the incremental prime lending rate. This amount would be payable for the full 4 year period. However, telecom companies have the option to convert this portion into equity stake.

This was part of the relief package announced by the government last month for the telecom companies to relieve them from cash flow stress. While Bharti is not in such a serious financial crunch as Vodafone Idea, they did see merit in conserving cash flows for the time being so as to have a bigger war chest to take on competition from Jio.

Sunil Mittal of Bharti Airtel has already stated that their company would use the cash flows saved during the moratorium to aggressively build the network. In the case of Bharti, the interest component over 4 years alone would work out to Rs.10,000 crore so if they swap it with their equity stake, it would entail handing over 2-3% stake in Bharti Airtel to the government of India.

The more important consideration for Bharti Airtel is that this moratorium will free up cash flows to the tune of Rs.40,000 crore which will give them enough ammunition to ramp up networks and drive profitability in the interim. Telecom companies need to invest heavily in upgrading networks and in spectrum to become 5G ready.

Among other things, the Telecom Relief Package also allowed sharing of airwaves, 100% FDI and change in the definition of revenues on which AGR is payable.

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