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Ultra short-term funds vs bank FDs: Where should I invest ₹7 lakh for 18 months?

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I have surplus funds of Rs. 7 lakhs, Which I will need after around 18 months for my daughter’s higher education. Where should I invest these funds? I was considering investing the same in bank FD. Please advise.

-Arun

The investment decision primarily depends upon your income tax slab. Assuming you are in 20% or the highest slab of 30%, then you should not invest your hard-earned money in a bank fixed deposit as post tax returns will not even beat the inflation. It will be a better option to invest your surplus fund into the “Ultra Short Duration Fund” of a reputed AMC. Due to the tax efficient structure of the said fund, your returns will be superior if compared with the post-tax interest from Bank Fixed Deposit. Also, you will enjoy the facility of “any time liquidity” which is not there in case of Bank FD (without penalty on interest income). However, if you have nil tax liability, you may consider investing in a suitable bank FD or a highest rated corporate FD i.e., Bajaj Finance which could offer little higher return than a Bank FDs.

I have several investments in various Mutual Fund Schemes, which include Debt Schemes as well as Equity Schemes. I have opted for the Dividend option in all the schemes, as I need regular income. What are the tax implications on Dividend income as I understand there have been some amendments in the same?

-Name withheld on request

Treatment of dividend income from various Mutual Fund schemes is fairly simple as all income tax liabilities on the same are taken care of, by the Asset Management Company (AMCs) themselves. In other words, whatever dividend incomes are received by you in your bank account from time to time are already tax compliant & you do not have to pay any further income tax on the same. You must include the net dividend amount received by you in your income tax return under the head “Income from other sources” and claim the same to be exempt from income tax as tax has already been paid by mutual funds themselves.

However, it is not advisable to opt for a dividend option for regular cash flow requirements. To fulfill the needs of regular income one can opt for SWP option from debt funds (Banking & PSU and Corporate Bond) as it is more tax efficient in nature. While opting for SWP, annual rate of withdrawal should be less than the net YTM of the debt funds to avoid the erosion of invested capital.

Query answered by Rajiv Bajaj, chairman & MD, Bajaj Capital Ltd.

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