Invest In Tax Saving Mutual Funds Online

Fixed income options for Indian investors have increased significantly over the last few years. While bank fixed deposits still remain a popular choice for parking money in a safe avenue, many new alternatives such as debt mutual funds, fixed maturity plans, bonds and corporate fixed deposits have emerged in recent years.

Bank fixed deposits are still the most convenient option for most investors. However, these typically offer much lower after tax returns when compared with the other options mentioned above. Investors can explore below three alternatives for improving their post tax returns.

1) Debt mutual funds and fixed maturity plans are taxed more leniently at 10% (for holding above 1 year) vis-à-vis bank deposits which are taxed at marginal tax rate of an investor (30.6% for investors with annual income above Rs 10 lakh). Hence, while the pretax returns of these funds may range between 9% and 11%, their post-tax returns are not much lower and range between 8% and 10%. A bank deposit, on the other hand, offering 10% pre-tax will yield below 7% in post-tax returns.

2) Tax-free bonds by REC, NHAI, HUDCO, etc have very good risk adjusted post tax returns. At 7.5% to 8% net of tax yield and very little credit risk, these bonds are a very good way to lock in a high rate of returns for long periods of time. The coupon bearing nature of the bonds ensures that the income is regularly realized. A nuanced added benefit of tax free bonds is that they are free from any worries about changes in the tax code affecting the future tax treatment of the returns.

3) Investors with tax rate lower than the marginal rate (annual income below Rs 5 lakh) can explore corporate fixed deposits for improving returns of their fixed income portfolio. These deposits, however, need to be evaluated carefully for the credit risk they have. Also, unlike bank deposits, these are not covered by deposit insurance. They are thus best opted for a limited part of the total fixed income investments.

An interesting lucrative fixed income opportunity in an easing monetary cycle regime such as now is to invest into long term debt. This can be done through focused mutual funds which offer schemes specializing in long term debt. Another alternative to invest in this opportunity is to buy zero coupon NABARD bonds on secondary market. The returns on these bonds are treated as capital gains and are thus taxed at 10% for holding periods longer than 1 year. If interest rates continue to fall through next few quarters, these bonds can provide capital appreciation of 3% to 6% in addition to the basic pre-tax yield of nearly 8.4%.