7.5% returns from Debt Mutual Fund add more to your kitty compared to 9% FD



Debt Mutual Funds offers supeiror tax-adjusted returns compared to Bank Fixed Deposits

YES, its very much true!

7.5% returns from Debt Mutual Fund add more to your kitty compared to 9% Bank Fixed Deposit for 1 year + time horizon

Its just based on the differential tax treatment of these 2 financial instruments where the applicable tax-bracket is 20% or higher

A bit about Taxation
Income from Fixed deposits gets added to your taxable income and get taxed at applicable rates whereas, gains from Debt Mutual Funds are treated as capital gains – Short-term capital gains if holding period is upto 1 year and Long-term capital gains for 1 year+ holding period.

Short-term capital gains gets added to you taxable income and taxed at applicable rates whereas long-term capital gains are either taxed at 10% (without indexation) or at 20% (with indexation), whichever is less.

Indexation is nothing but the adjustment of your purchase based on Cost Inflation Index (CII), which is being published for every financial year by the govt.
Indexed Purchase Price = (Original Purchase Price) x (CII of Selling Year)/(CII of Purchase Year)

Quick glance on impact of Taxation

Post Tax Returns Comparison for 1 Year and 1 day time-horizon
Scenario 1: FD Return – 9%, Debt Mutual Fund Returns – 7.5%
Financial Instrument
+ Tax Slab
Nominal Value of
1 lac
Applicable Tax Liability Post-tax Value of 1 lac
FD – 30% tax bracket 109,000 2,781 106,219
FD – 20% tax bracket 109,000 1,854 107,146
FD – 10% tax bracket 109,000 927 108,073
FD – 0% tax bracket 109,000 0 109,000
Debt Mutual Fund
– Any tax bracket
107,500 0 107,500   
Applicable Tax liability includes 3% additional cess.
Long-term capital gains of Debt Mutual Fund are considered based for sale proceeds in FY13-14;
CII for FY12-13: 852; CII for FY13-14: 939. Indexed Cost of purchase = (100,000)*(939/852) = 110,211
Long Capital capital gains = 107,500 – 110,211 = -2,711
Scenario 2: FD Return – 9%, Debt Mutual Fund Returns – 9%
Financial Instrument
+ Tax Slab
Nominal Value of
1 lac
Applicable Tax Liability Post-tax Value of 1 lac
FD – 30% tax bracket 109,000 2,781 106,219
FD – 20% tax bracket 109,000 1,854 107,146
FD – 10% tax bracket 109,000 927 108,073
FD – 0% tax bracket 109,000 0 109,000
Debt Mutual Fund
– Any tax bracket
109,000 0 109,000   
Applicable Tax liability includes 3% additional cess.
Long-term capital gains of Debt Mutual Fund are considered based for sale proceeds in FY13-14;
CII for FY12-13: 852; CII for FY13-14: 939. Indexed Cost of purchase = (100,000)*(939/852) = 110,211
Long Capital capital gains = 109,000 – 110,211 = -1,211

In Scenario 1, on a post-tax basis, even 7.5% return from Debt Mutual Fund has beaten 9% Fixed Deposit returns for 20% and 30% tax slabs.

In Scenario 2, same 9% return from both the instruments but on a post-tax basis Debt Mutual Funds have beaten FD returns for 10%, 20% and 30% tax brackets and matched for ZERO tax.

Some perspective and thoughts..
While deciding a financial instrument, taxation aspect should be given due consideration.

Debt Mutual Funds can act as superior alternatives to traditional saving instruments like Bank Fixed Deposits. Having said that, due consideration need to be given in terms of identifying right and suitable Debt Mutual fund based on individual’s objectives and time-horizon.

We will have a separate post detailing Debt Mutual Fund as a category.


Do you want to Manage your Money Smartly for short term (upto 3 years) with Superior and Predictable Risk-reward proposition compared to traditional saving instruments like Savings A/c and Fixed Deposits?

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