Details about Debt Funds.

Dept funds as debut security with a credit card rating allow the investor to understand the possibility of debt user in the principal and interest.


Who should invest in Debut Funds?

Debt Funds are highly recommended to investors because of their lower risk tolerance. It is the funds that usually give the securities to ensure stable returns. In this, there are no guarantees; the returns are usually in an expected range.

They have the following benefits which are the follows:

Medium-Term Investors: This Medium-term investors in debut funds are off (3-12 years), so if you want to invest in a low-risk instrument. Investing in the dynamic bond fund is a fund that is for small tenure and tends to offer better returns than Fixed Deposits. 

Short-Term Investors: The Short-Term Investor is a regular saving account for 3-12 months, offering 7 to 9 percent returns.

Types of Debut Funds:

Based on the maturity period, there are the following types of debt funds:

  1. Liquid Funds
  2. Money Market Fund
  3. Dynamic Bond Fund
  4. Cooperate, Bond Fund,
  5. Banking and PSU fund
  6. Gilt Fund
  7. Credit Risk Fund
  8. Floater Fund
  9. Overnight Fund
  10. Ultra-Short Duration Fund

Liquid Funds: Liquid Funds are the Funds in which you can invest in a money market instrument having a maturity of a maximum of 91 days that tends to a better return than a saving account and is good for short-term savings.

Money Market Funds: The Money Market Fund invests in the money market instrument with a maximum instrument maturity of 1 year which is good for investors looking for low-risk debt securities.

Dynamic Bond Fund: This type of investment varies in maturity based on the interest rate. It is good for investors with moderate risk tolerance and an investment horizon of 3 to 5 years.

Cooperate Bond Fund: Cooperate Bond fund which invests a minimum of 80% of its assets in cooperating bonds having the highest rate. This is good for investors with lower risk tolerance and seeking to invest in high-quality.

Banking and PSU Funds: Banking and PSU funds invest at least 80% of their total assets in debt securities of PSU and Banks.

Gilt Fund: Gilt Funds invest a minimum of 80% of 

their investible corpus in government securities across varying maturities.

Credit Risk Funds: In this, you can invest at least 65% of its invisible corpus in cooperate bonds having a rating below the highest quality cooperate bonds.

Floater Fund: Floater Fund invest a minimum of 65% of the investible corpus in floating rate instrument and carry a low-interest rate risk.

Overnight fund: Overnight fund invests in debt securities having a maturity of 1 day which is considered extremely safe since both credit risk and interest rate risk are negligible.

Ultra-Short Duration Fund: Ultra Short Duration invests money market instruments and debt securities with a scheme between three and six months.

How much is the Tax Liability on Debt Mutual Fund Earning?

Debt Mutual funds are subject to taxation per the Income Tax Act 1963. The tax liability on the dividend return of such funds is not levied on the investors directly.

The tax rate depends on the income tax when the investors fall in TDS on dividend distribution by the mutual fund from the same date.

The capital gains are made through the sale and purchase of NAV units in the stock market, known as capital gains. As the debt mutual funds taxation is the debt fund sold within three years, it is called short-term capital gains. The investor gets the total profit earned is taxable depending on the annual income.

If the mutual debt fund is held for more than three years, it is knowns as a long-term capital gain. They are as follows.

With Indexation Benefits of 20%

Without Indexation, benefits are according to the income of the investor.

Tax on the capital Gains on debt mutual funds

Type Eligibilty Criteria Tax rate
Short term capital gain Security was held by the investor for less than 3 years The annual income of the individual.
Long term capital gain A time period of the NAV units if debt mutual funds should be more than three years. Depends upon the income of the investor without indexation 20% with indexation.

What is Indexation?

Indexation is the process by which your account for inflation in your debt fund gains that you can pay fewer taxes. The benefits of the Indexation returns above this inflation where you can purchase prices according to the ongoing inflation rate, the gap between the sale and price will reduce, and you will pay lower taxes.

Calculation Indexation Debt Funds

Every year the tax adjustment of capital gain depends on the cost of the inflation index declared by the central board of direct taxes. 

Actual Value after indexation = original amount * (CII of the current year/CII of the purchasing year)

Let’s demonstrate it.

A man invested Rs 1 Lakh in a mutual debt fund in 2014. Four years later, he redeemed his investment at Rs 1.8 lakh in 2018, realizing a profit of Rs 80,000.

The nominal Value of investment determined by the indexation formula:

Actual Value after indexation = original amount * (CII of the current year/CII of the purchasing year)

Indexaion-indexed worth = 1,00,000* (280/240) = Rs 1,16,666.67.

Therefore the total gain = Redemption Value-Indexed cost

Rs (1,80,000-1,16,666.667) = Rs 63,333.33

The Value is subjected to a tax deduction of 20% of its Value.

Tax payable = 20/100*63,333 = Rs 20/100*63,333 = Rs 12,666.67

Total Realisable profit = Redemption value -tax payable

Rs (80,000-12,666.67) = Rs 67,333.33

Taxation Without Indexation benefit:

The tax treatment of Rs 80,000 is the capital gain.


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