Mutual Funds

Your Fund Portfolio

Anand Kalyanaraman | Updated on March 10, 2018

I retired from service in August 2017. I am a bit confused over the tax aspect on lumpsum mutual fund investment. I have invested fully in the Senior Citizens Scheme, lumpsum amount in LIC’s PM Vaya Vandana Yojana and the rest in bank fixed deposits. I am also getting pension from my employer. Please advise whether I should invest in mutual funds (equity/debt/balanced/other) in SIP or lumpsum mode (maximum ₹2 lakh). Also, please explain capital gain tax implications on mutual funds.


From a tax perspective, mutual fund schemes are of two types — equity oriented schemes and non-equity oriented schemes. Equity oriented schemes are those that have at least 65 per cent of their corpus in Indian stocks. Non-equity oriented schemes are those that have less than 65 per cent of their corpus in Indian stocks; these include debt schemes, gold schemes, international schemes and fund-of-fund schemes.

Taxation of capital gains on mutual funds — the gains on the investment — depends on the type of the scheme, whether equity or non-equity, and the holding period, that is, the time for which the investment has been held from the time of purchase. Equity oriented schemes enjoy beneficial tax treatment. Gains on equity oriented schemes that have been held for more than 12 months are long-term capital gains while gains on schemes held for 12 months or less are short-term capital gains.

There is no tax on long-term capital gains on equity oriented schemes while short-term capital gains are taxed at a flat 15 per cent, irrespective of the tax slab rate of the investor.

In non-equity oriented schemes, gains on schemes held for more than 36 months are considered long-term capital gains while gains on schemes held for 36 months or less are considered short-term capital gains. Long-term capital gains on non-equity schemes are taxed at 20 per cent with indexation benefit, that is, after adjusting the cost of purchase for inflation. Short-term capital gains on non-equity schemes are taxed at the investor’s slab rates, 10 per cent or 20 per cent or 30 per cent.

Besides the above tax rates, cess at 3 per cent and surcharge, if applicable, will apply to capital gains on both equity and non-equity oriented schemes. The capital gains tax rules are the same whether the investment is made lump sum or through the systematic investment plan (SIP) route. In the case of SIPs, the first-in-first-out (FIFO) rule is followed. That is, the oldest units are assumed to be sold first.

You have done well to invest in the Senior Citizens Savings Scheme (SCSS) offered by the post office and the Pradhan Mantri Vaya Vandana Yojana (VVY) offered by LIC. These are among the best debt options for senior citizens currently with high safety and relatively attractive rates – 8.3 per cent currently in SCSS and 8 per cent in VVY. Bank fixed deposit rates have fallen quite a bit; they are about 7 per cent for senior citizens now. That said, they are fairly safe and offer good liquidity. Continue to have a portion of your investments in fixed deposits for the convenience and safety they offer.

Whether you should invest in mutual funds and the kind of fund you should invest in depends on several factors – your risk taking ability, time horizon, investment objective and liquidity needs. Since you get pension from your employer, we presume your liquidity needs are not high and you have a long time horizon. If you have high risk taking ability, equity schemes or equity oriented balanced schemes may be a good bet for the long-term. Else, relatively safer debt funds may be better. Among equity oriented funds, SIPs in well-run large-cap schemes (such as Aditya Birla Sun Life Frontline Equity) or balanced schemes (such as ICICI Prudential Balanced) may be safer bets, given the sharp run-up in the market. Avoid lumpsum investments in equity oriented funds currently. Among debt funds, you can consider short-term funds with a good track record such as HDFC Regular Savings Fund and UTI Short Term Income Fund. Compared to bank fixed deposits, short-term debt funds can give better returns but carry higher risk.

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Published on December 31, 2017

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