Tax on capital gains payable while filing IT return

Gold ETFs are listed on stock exchanges and can be traded just like a stock. One can buy and sell them through either a broker or an online trading platform. They are fairly liquid though trading volumes for AMCs might vary. There is no exit load, but you might need to check the tax impact as they are treated like debt MFs. Any capital gain from the sale of gold ETFs within three years of purchase would attract short term capital gains tax at the marginal rate, i.e., the highest tax rate applicable on your income. Long-term capital gains tax (beyond the three-year holding period) is payable at 20%, with indexation benefit.

I want to invest R2 lakh for a year. What are the risks associated with bank FDs and debt funds?

Debt funds no longer offer tax advantages over FDs, especially if the holding period is less than three years. Assess the expected returns from debt MFs and the risks associated, and see how they compare with one-year FDs. For a one-year horizon, within debt MFs you can consider fixed maturity plans (FMPs) and short-term income funds (STIFs).

There are two key risks associated with debt funds. First, interest rate risk as debt instruments’ prices and interest rates are inversely related, i.e., if interest rates go up, prices come down (thereby generating a negative return), and vice versa. Second, credit risk, i.e., the risk of the company issuing the instrument defaulting on interest payment and/or principal repayment.

FMPs are closed-ended and usually don’t have any interest rate risk — they invest in instruments whose maturity is equal to the fund’s maturity. A one-year FMP would typically invest in debt instruments maturing in a year or less. STIFs do carry some interest rate risk as they invest in short- to medium-term debt instruments (typically 1-3 years), but they also provide additional upside when interest rates trend lower. Both FMPs and STIFs declare their portfolios’ credit quality, with which you can assess credit risk. Typically, most FMPs and STIFs invest in AA- and AAA-rated instruments, eschewing risk.

I want to sell some mutual fund units that I bought in October last year. Do I have to pay any tax? If yes, how is the tax paid?

Any short-term capital gain (for holdings less than a year) generated from equity MFs is taxable at 15%. For non-equity funds, including debt funds and MIPs, short-term capital gains tax, which is applicable for a holding period of less than three years, is payable at your marginal rate of taxation. Capital gain taxes are payable at the time of filing your IT return.

If you invested in the dividend option, no tax is payable on the dividends generated. However, on debt funds, the applicable dividend distribution tax is deducted by the AMC prior to the disbursal of dividends. So, no tax on dividends is payable in your hands.

Is it better to invest directly in mutual funds since the charges are low? What are the advantages of investing through an agent?

Expense ratios for direct investments into MFs are lower than those applicable for investments through an agent. For equity MFs, the expense ratios on direct plans would be lower by approximately 50-75bps whereas for debt MFs they would be lower by 10-75bps (depending on the type of fund chosen).

Direct plans are typically meant for large investor-like institutions, who can select appropriate funds and manage their portfolios based on their requirements. The advantages of investing through an agent include assistance in selecting the right scheme based on your risk profile, investment objectives and investment horizon. You also get regular updates and someone qualified monitors your portfolio. Agents also suggest necessary changes from time to time. But selecting the right agent is equally essential. He should be qualified to provide advice and, most important, should be trustworthy.