Debt Funds refer to those mutual fund schemes that predominantly invest in debt securities and money market instruments. These funds aim to generate fixed income for the investors who do not wish to put their invested capital at high risk, such as into equity funds. Oftentimes they are included in investors’ portfolios to balance risks and returns.
To know more about Debt Funds, visit: What are Debt Funds?
Taxation on debt funds depends on the holding period of the fund units. If the fund units are redeemed before 3 years of investment, Short Term Capital Gains (STCG) tax as per the income tax slab of the investor is levied. If the investor redeems the fund units post 3 years of investment, Long Term Capital Gains (LTCG) tax of 20% is levied, with the benefit of indexation.
Illustration – Taxation of Debt Funds
- Short Term Capital Gains Tax
If an investor has made a capital gain of ₹50,000 on investment in a debt mutual fund and withdraws the amount before 3 years of investment, STCG tax would be levied, as per the income tax slab of the investor. ₹50,000 would be added to the taxable income of the investor (as income from other sources) and taxed accordingly.
- Long Term Capital Gains Tax
If an investor withdraws the investment including capital gains post 3 years of investment, LTCG Tax of 20% is levied, with the benefit of indexation.
Indexation reduces the value of overall Long Term Capital gains to reflect the effect of inflation on your investment.
To calculate the final value of capital gains post indexation, we use government’s Cost Inflation Index (CII) in the following formula:
Indexed cost of Acquisition = Investment Amount * (CII of the year of withdrawal/ CII of the year of investment)
Suppose the investment amount is ₹70,000 in the year 2016 and the withdrawal amount is ₹1 Lakh. The value of capital gains is ₹30,000 before indexation
Indexed Cost of Acquisition= 70000* (280/254) = 77165.35
Note: CII in the year 2015 = 254
CII in the year 2018 = 280
Final Value of Capital Gains= 1,00,000- 7,7165.35 = 22834.65
Tax Payable = 20% of 22,834.65 = 4,566.93
List of Best Performing Debt Funds to Invest
Here is a list of top 5 debt funds, you can consider investing to generate quality returns:
| Fund Name | AUM (cr.) | 3 – Year Returns | 5 – Year Returns |
| Nippon India Gilt Securities Fund | ₹ 1,135 | 10.04% | 10.67% |
| SBI Magnum Medium Duration Fund | ₹ 3,100 | 9.14% | 9.95% |
| Kotak Credit Risk Fund | ₹ 5,280 | 7.90% | 9.16% |
| ICICI Prudential Ultra Short Term Fund | ₹ 8,612 | 8.12% | 9.08% |
| Franklin India Liquid Fund | ₹ 13,546 | 7.03% | 7.39% |
{Note: Funds have been ranked on the basis of 5 year returns}
{Data as on March 30, 2020; Source: Value Research}