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January 30, 2024

Margin Money in Education Loans

margin-money

Ever heard of the term Margin Money in Education Loans? How does it affect the average student? Do all students need to pay margin money? Find out in this article what margin money is, why it is important for students to know of it, and if it’s a compulsory fee or not! 

What is Margin Money? 

In the context of education loans in India, margin money refers to the portion of the total educational expenses that the borrower (student or their parents/guardians) needs to fund from their own resources.

In other words, it is the borrower’s contribution toward the overall cost of education, and the remaining amount is covered by the education loan. 

The concept of margin money is prevalent in the education loan process to ensure that students and their families have a financial stake in the education expenses. The margin money requirement helps in sharing the financial burden between the borrower and the lender. The margin money percentage can vary depending on the loan amount and the policies of the lending institution. 

For example, if the total cost of education is ₹10,00,000 and the margin money requirement is 5%, the borrower would be required to contribute ₹50,000 from their own funds, and the education loan would cover the remaining ₹9,50,000. 

It’s important for students and their families to be aware of the margin money requirement when applying for education loans, as it influences the amount that needs to be arranged independently to meet the educational expenses. The terms and conditions, including margin money requirements, can vary among different banks and financial institutions offering education loans.

The Role of Margin Money in Loan Disbursement 

Margin money plays a significant role in the disbursement of education loans in India. Here’s how it typically works:  

1. Calculation of Total Cost: 

Before applying for an education loan, the borrower needs to determine the total cost of the educational program. This includes tuition fees, accommodation, books, and other related expenses. 

2. Determination of Margin Money: 

The lending institution specifies a margin money percentage that the borrower must contribute from their own funds. For instance, if the margin money requirement is 10%, and the total cost of education is ₹5,00,000, the borrower needs to provide ₹50,000 as margin money. 

3. Loan Amount Calculation: 

The loan amount is calculated by subtracting the margin money from the total cost of education. Using the example above, if the total cost is ₹5,00,000 and the margin money is ₹50,000, the loan amount would be ₹4,50,000. 

4. Disbursement Process: 

The education loan is disbursed based on the approved loan amount. The lending institution releases funds directly to the educational institution or provides the borrower with the necessary funds, depending on the terms of the loan. 

5. Use of Margin Money: 

The margin money contributed by the borrower is typically used to cover initial expenses or as a security deposit, depending on the requirements of the educational institution. 

6. Repayment Structure: 

The repayment structure of the education loan is based on the disbursed loan amount. The borrower is required to repay the loan amount along with applicable interest over the agreed-upon repayment period. 

Understanding and fulfilling the margin money requirement is essential for students and their families when seeking education loans. It ensures a shared financial responsibility and helps in the smooth disbursement and repayment of the loan. The terms and conditions, including the margin money percentage, may vary among different banks and financial institutions 

7. Margin Money Calculation Formula 

The formula for calculating margin money is straightforward. It is given by: 

Margin Money = Total Cost of Education × (Margin Money Percentage/100)  

Let’s go through an example to illustrate this: 

Suppose the total cost of education is ₹3,00,000, and the lending institution requires a margin money contribution of 15%. 

Margin Money = ₹3,00,000 × (15/100) 

Margin Money = ₹3,00,000 × 0.15 

Margin Money = ₹45,000 

Margin Money=₹45,000 

So, in this example, the margin money required would be ₹45,000. The borrower would need to provide this amount from their own funds, and the education loan would cover the remaining ₹2,55,000 (₹3,00,000 – ₹45,000) based on the margin money percentage and total cost of education. 

Margin Money Requirements by Major Banks and NBFCs 

When comparing margin money requirements, consider factors such as: 

1. Loan Amount vs. Margin Money Percentage: 

Evaluate how the margin money percentage influences the loan amount. Different institutions may have varying percentages. 

2. Total Cost of Education: 

Check if there are any restrictions on the types of expenses considered in the total cost of education. 

3. Flexibility and Terms: 

Assess the flexibility offered by each institution in terms of margin money payment and any variations based on the course or program. 

4. Interest Rates and Repayment Terms: 

Consider the overall terms of the education loan, including interest rates and repayment periods, in addition to the margin money requirement. 

5. Eligibility Criteria: 

Understand any specific eligibility criteria associated with margin money, such as the applicant’s income, credit history, or collateral requirements. 

To obtain specific and accurate information, reach out to the education loan departments of different financial institutions, and inquire about their current policies and margin money requirements. 

Public Sector Banks vs. Private Sector Banks 

The margin money policies of public sector banks (PSBs) and private sector banks differ based on their respective approaches, ownership structures, and government regulations. Here’s a general comparison: 

Public Sector Banks (PSBs)

1. Government Influence: 

PSBs often have margin money policies influenced by government guidelines and regulatory frameworks. 

Margin money requirements may vary based on the type of educational course and loan amount. 

2. Flexible for Social Objectives: 

Some PSBs may have more flexibility in margin money requirements for courses that align with national priorities or social objectives. 

3. Government-Sponsored Schemes: 

PSBs may participate in government-sponsored education loan schemes with reduced or no margin money for economically disadvantaged students. 

4. Interest Rate Subsidies: 

In some cases, PSBs may offer interest rate subsidies or concessions to certain categories of students, impacting the overall financial burden. 

Private Sector Banks 

1. Market-Driven Approach: 

Private sector banks often adopt a market-driven approach, setting margin money policies based on their assessment of risk and profitability. 

2. Varied Margin Requirements: 

Margin money requirements in private banks may vary widely based on factors such as the loan amount, course type, and the creditworthiness of the borrower. 

3. Focus on Risk Management: 

Private banks may emphasize risk management, adjusting margin money requirements to mitigate potential loan default risks. 

4. Customer-Centric Solutions: 

Some private banks may offer customized margin money solutions, considering the unique circumstances and financial capabilities of individual borrowers. 

General Considerations

Regulatory Guidelines: Both public and private sector banks must adhere to regulatory guidelines set by authorities, impacting their margin money policies. 

Negotiation Possibilities: While public sector banks may have more standardized policies, private sector banks may allow more room for negotiation based on individual cases and creditworthiness. 

Loan Amount and Course Type: The margin money requirements often depend on the total loan amount and the type of educational course. Professional courses might have different requirements than undergraduate or postgraduate programs. 

It’s crucial for students to directly inquire with specific banks, whether public or private, to obtain accurate and up-to-date information on their margin money policies. Policies can vary not only between public and private banks but also among individual banks within each sector. 

Zero Margin Money Options 

Some banks and NBFCs in India may offer education loans with no margin money requirement or minimal margin. Keep in mind that these policies can vary based on factors like the course, loan amount, and the lender’s discretion. Here are a few institutions that, in the past, have been known for flexible margin money requirements: 

1. Avanse Financial Services: 

Avanse is an NBFC that has been recognized for providing education loans with flexible terms, including competitive interest rates and customized repayment plans. 

2. Axis Bank: 

Axis Bank has been known to offer education loans with no margin money requirement for certain loan amounts. Their policies, however, may vary, so it’s advisable to check with the bank directly. 

3. IDBI Bank: 

IDBI Bank has, in some cases, provided education loans with no margin money requirement, especially for specific courses or loan amounts. It’s recommended to verify this information with the bank. 

4. Canara Bank: 

Canara Bank has offered education loans with minimal or no margin money requirement for certain categories of loans. Always check with the bank for the latest policies. 

5. Bank of Baroda: 

Bank of Baroda may offer education loans with a reduced margin or no margin money requirement for certain courses and loan amounts. Verify the current policies directly with the bank. 

The Relationship Between Margin Money and Overall Expenses 

The amount of margin money in education loans is often influenced by the total expenses of education. Generally, as the total educational expenses increase, the percentage of margin money required may decrease.

Lenders may adjust the margin to accommodate higher overall costs, making education financing more accessible for students. However, specific margin money requirements can vary among lenders and institutions, and regulatory guidelines may also play a role in determining the relationship between margin money and total expenses.

It’s crucial for students to review the policies of individual lenders and educational institutions to understand how margin money is influenced in the context of the total cost of education. 

Impact of Lower Overall Expenses on Margin Money 

The inverse relationship between overall expenses and margin money lies in the fact that as overall educational expenses increase, the proportion of margin money required decreases.

Higher expenses often lead to more substantial loans, and lenders may be willing to lower the margin percentage to accommodate larger loan amounts. 

Strategies for Minimizing Margin Money 

To minimize margin money, students can explore scholarships, grants, and part-time work opportunities to cover educational expenses. Negotiate with lenders for flexible repayment plans and consider community college or online courses for cost savings. Efficient financial planning can reduce the burden significantly. 

FAQs

What is margin money in the context of education loans? 

Margin money refers to the portion of the total educational expenses that the student is required to fund from their own resources. It is the percentage of the total cost that is not covered by the education loan, and students are expected to contribute this amount. 

Why do lenders require margin money for education loans?

Lenders require margin money to mitigate risk and encourage financial responsibility. When students contribute their own funds, it reduces the likelihood of default, and it signals to lenders that the student is financially committed to their education.

How is the margin money percentage determined?

The margin money percentage is often influenced by regulatory guidelines, institution policies, and the total cost of the educational program. It varies among lenders and educational institutions. Always check with the specific lender or educational institution for their policies. 

Can the margin money be borrowed from another source or does it have to be from personal savings?

Generally, lenders prefer that margin money comes from the student’s personal savings or contributions from family. Some lenders may not allow borrowing the margin money from another loan source. It’s important to clarify this with the lender. 

How does providing margin money benefit students? 

Providing margin money benefits students by instilling financial responsibility, reducing the overall loan burden, enhancing creditworthiness, and fostering a sense of ownership and commitment to their education. 

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6 types of risk associated with Mutual Funds

In the previous article, we discussed taxation in mutual funds. In this article, we will discuss the types of risks associated with mutual funds. Mutual funds are excellent investment options for both novice and seasoned investors; they are currently a very popular investment option due to their capacity to provide inflation-beating returns.   Mutual funds combine money from a range of individuals and institutions and invest in various asset classes such as shares, debt, and other money market instruments after conducting thorough research to maximize capital appreciation or income generation.  The investors are subject to risks like volatility risk, management risk, liquidity risk, interest rate risk, and inflation risk. We shall now discuss all such risks that come up with an investment in mutual fund schemes; a sound knowledge of these is helpful to an investor in making the investments.  There are two types of mutual funds: equity mutual funds and debt mutual funds. Risks associated with mutual funds There are major two types of risks associated with mutual funds that the article will discuss such as risks associated with equity mutual funds and risks associated with debt funds. 1. Management risk A company's management refers to the group steering the organization on the right path.   Changes in the management team and their activities, such as pledging shares, decreasing or increasing promoter stakes, and so on, can impact the price of a company's stock.   While principles such as solid corporate governance and high transparency benefit a company's stock, mismanagement, team conflicts, and other factors depress the stock price and thereby affect your mutual fund investments as well if that particular stock is a part of your investment.  2. Liquidity risk When it comes to equity investments, long-term investing has the best possibility of securing investment profitability.   Thus, it is difficult for equity mutual funds to quickly buy or sell stock investments to profit or minimize a loss leading to a situation where the scheme's liquidity is insufficient to meet investors' redemption requests.   A liquidity crisis like this is most prevalent when investors make a high number of redemption requests due to prolonged bad market inequities.   Many equity funds invest a small amount of their capital in debt and money market instruments to mitigate this risk and ensure more substantial returns.  3. Volatility risk An equity mutual fund invests mainly in the stocks of publicly traded corporations.   As a result, an equity fund's value is in line with the performance of the companies in whose stocks it has invested. Current macroeconomic conditions have an impact on the company's performance.   Government, Sebi, and RBI policies, consumer preferences, the economic cycle, and other macroeconomic changes are all examples of factors that directly impact the price of company stock, either positively or negatively.   The value of an equity fund is affected by this movement. Large-cap corporations, on average, are less prone to such volatility than mid-cap and small-cap market enterprises.   Similarly, when compared to thematic or sectoral equity, funds are diversified. Equity funds are less likely to be influenced by such volatility. Risks associated with debt funds 1. Inflation risk Bonds and money market instruments are fixed-rate instruments because their coupon rates are fixed. As a result, rising inflation erodes the coupon rate-based revenues that the debt fund aims to receive.   As a result, rising inflation causes bonds to trade at a lower price on the bond markets, lowering their potential returns for the debt funds investors. On the other hand, lower inflation tends to push bond prices and debt fund investment values higher.  2. Credit risk Government securities, corporate bonds, certificates of deposits, commercial papers and other debt and money market instruments are among the items that debt funds invest in.   Credit ratings such as AAA, AA+, AA, AA- and so on are offered by credit rating agencies such as CRISIL, ICRA, and Fitch they evaluate the credit quality of these investments, which vary depending upon the issuer.   A specific risk is that the borrower fails; they do not pay the principal and/or interest on the loan.  3. Interest rate risk A risk linked with debt funds is interest rate risk. Bonds are exchanged in the same way as stocks, and their prices fluctuate.   The economies' interest rates mainly influence the movement in bond prices; the link between interest rates and bond prices is the opposite. As a result, as the economies' interest rate rises, the values of current bonds fall since they continue to offer the same interest rate.   Interest rate risk refers to price variation in bonds caused by changes in interest rates it is a market-wide element that influences bond prices and, as a result, the value of all debt mutual funds.   The degree of interest rate sensitivity varies by debt fund type and is shown by the adjusted duration of the debt fund.   In general, debt funds that invest in shorter-term assets are less vulnerable to interest rate risk than those that invest in longer-term products.  With regard to the above-mentioned risks, it is vital to note that while mutual fund performance is always subject to numerous risks, every fund house employs a variety of tactics to reduce, if not eliminate, these well-known dangers.   As a result, even if your investment gains are not guaranteed, your chances of developing your wealth are good if you invest with a well-known fund house, choose a fund with an established track record, and make the investment with a long-term horizon. FAQs What are the three main risks associated with mutual funds? The three main risks associated with mutual funds are: Management risk Liquidity risk Volatility risk Do mutual funds have high risk? All mutual funds are risky. Its terms and conditions specify that mutual funds are volatile in nature and are subject to market ups and downs. There are different levels of risk involved in mutual funds. What is the biggest risk for mutual funds? The biggest risk for mutual funds is inflation. Inflation affects different types of funds differently. Rising inflation causes bonds to trade at a lower price on the bond markets, lowering their potential returns for debt fund investors. On the other hand, lower inflation tends to push bond prices and debt fund investment values higher. Consult an expert advisor to get the right plan for you TALK TO AN EXPERT
7 amazing tips to break free from debt

7 amazing tips to break free from debt

In the previous article, the focus was on education inflation and its impact on our savings. This article will discuss how to break free from debt. Debt, this dreaded four-letter word, is a nightmare for most people. However, everyone has a debt of some kind, whether credit card debt, student debt, home mortgage, personal debt, or more.   Debt is an unavoidable part of life. Dealing with debt often leads to stress and anxiety and can impact your physical health. There are both good debts and bad debts. The debt that creates a valuable asset (tangible or intangible) for you is good debt.   Debt that keeps on exerting negative pressure to pay off is known as bad debt. You need to remove this bad debt to live a stress-free life. How do you break free from debt?  Here is a step-wise guide to help you break the vicious cycle: Assess your situation: To get out of the debt trap, you must know where you stand. Check all your accounts and add up your liabilities (all types) to know how much you owe and to whom. Calculate your net worth by subtracting your liabilities from your assets. This will help you know your worth on paper.   Know where you spent your money: It is important to categorize your expenses into housing, transport, food, travel, miscellaneous, and debt. An example of a bad monthly budget is where the debt is almost equivalent to income. You need to get your basics of spending right as your first step.   Improve your budget: When you don't follow the rule “Spend less than you earn” that's how your debt problem arises. Living below your means is a very important thing that one should take care of to avoid getting into a debt cycle or when trying to get out of it. Unless you manage to spend less than you earn, you will always be in debt and never be able to come out of it.   Pay off your high-interest debt in full every month: Your credit card bills keep on mounting because you do not pay them in full every month. It happens because you take on more interest-bearing debt than you can manage. Paying off your credit card bills and other debts very religiously every month will do good for your credit score and will be a good step to lighten your debt burden.   Source: Pexels Some effective ways to reduce your debt  Use the snowball effect: Start paying off your small debts and then tackle the bigger ones. Put as much money towards paying that one small debt, and once it is done with, the free money from that shall go to the next big one. As you proceed with wiping out debt, the amount going to the current payment will increase. Another way is to tackle the highest interest debts first (to save on interest payments) and proceed.   Pay more than the minimum amount: You pay both the principal and the interest when paying down debt. So, paying more than the minimum for a particular month means cutting the principal for the next month and thus, saving money on interest payments.   Increase your income: An increase in your income will solve half your debt problems if you know how to channel your money. An increased income from the same work or a new income from a different income source will leave more money in your hands to get out of that unwanted debt you are in. You have to help yourself in this regard. FAQs What are 3 ways to eliminate debt? The 3 ways to eliminate debt are: Budgeting, increasing your income, and paying your debt on time without accruing more interest. What are the 5 ways to get out of debt? The 5 simple ways to get out of debt are: Listing your debt obligations, creating a budget for repayment, increasing your income and paying your debt on time without accruing more interest and finally reducing your daily/miscellaneous expenses to create space for savings and investing. What are the 5 golden rules for managing debt? The golden rules for managing debt are: Budgeting your expenses and debt, actively generating more income and wealth, paying your debt on time without any delays or additional interest, reviewing your spending habits, and avoiding future debt traps. How do I clean up my debt? Stepwise guide to help you break the vicious cycle:   Assess your situation   Know where you spent your money   Improve your budget   Pay off your high-interest debt in full every month   What is the best solution for debt?   Start paying off your small debts and then tackle the bigger ones. Put as much money towards paying that one small debt, and once it is done with, the free money from that shall go to the next big one. As you proceed with wiping out debt, the amount going to the current payment will increase. Another way is to tackle the highest interest debts first (to save on interest payments) and proceed.   How to live a debt-free life? When you don’t follow the rule “Spend less than you earn”, that’s how your debt problem arises. Living below your means is a very important thing that one should take care of to avoid getting into a debt cycle or when trying to get out of it. Unless you manage to spend less than you earn, you will always be in debt and never be able to come out of it. How can I recover from debt fast? It is important to categorise your expenses into housing, transport, food, travel, miscellaneous, and debt. An example of a bad monthly budget is where the debt is almost equivalent to income. You need to get your basics of spending right as your first step.     Consult an expert advisor to get the right plan for you TALK TO AN EXPERT
8 ways you can invest in mutual funds

8 ways you can invest in mutual funds

What is a mutual fund? Mutual funds are investment vehicles that pool money from multiple investors and invest them into equity, debt, other related instruments, and asset classes after thorough research and analysis. Each mutual fund portfolio is managed by a fund manager who has a great deal of experience in the industry. Their decisions are substantiated and are taken after following the thorough research done by the AMC's research analysts. As individual investors, we do not have enough time to perform such research to make a well-informed choice on “Where to invest to gain maximum returns?” or “Where to invest in the long-term?” We may also not have enough capital to make a diversified portfolio to sustain the blows of market fluctuations. Mutual funds provide a one-stop solution for both issues. Why should one invest in mutual funds? a) Money managed by experts The fund manager and his army of research analysts are experts in the field of investing. They make informed choices with respect to every penny and always aim to provide the promised objective to their pool of investors. b) Liquidity Redemption requests are handled with great ease in fund houses. The investor can also buy/sell his units in the secondary market (in an open-ended fund) for redemption (withdrawal) of the units. c) Diversification Despite having low ticket sizes for investment, an investor can receive returns that mimic or beat the market performance. He/she can own a portfolio that is diversified across market capitalization or across sectors or different companies to sustain the blows of volatility. d) Lower cost The funds charge a small % of the NAV or your gains from the fund as a management fee which is also known as the expense ratio. These are also regulated by SEBI and have an upper limit to ensure that the funds do not overcharge the investors. e) Fund switch options One can invest in a debt fund and have the plan to have a systematic transfer into equity or vice versa to match the risk appetite, financial goals, and other factors. f) Tax saving with equity linked savings scheme (ELSS) Mutual funds also allow you to save some part of your income and claim it for tax deduction under 80C. Rupee Cost Averaging: Investing in Mutual funds through SIPs averages the cost of purchase/unit. Regulation: Funds are highly regulated and are designed to ensure retail investor protection. Ways you can invest in mutual funds If you are a new investor, you will need to complete your Know Your Customer (KYC) compliances through distributors, online platforms, or mutual fund houses (KRA – KYC Registration Agencies) – SEBI registered intermediaries. This is a one-time mandated process by SEBI to prevent fraudulent transactions. 1. Through an agent An investor may contact an agent who would direct the investor to invest in different mutual funds based on risk appetite, investment horizon, goals, and other factors. There is no commission that is to be paid to the agent. The fee is paid by the fund house and is deducted from the expense ratio paid by the investor to the AMC. Login credentials are given by each fund house which enables the investor to receive real-time data on fund performance. 2. Asset Management Company (AMC) One can directly invest in the fund house through this route. However, the investor needs to perform some amount of research before choosing the fund and the fund house. He/she can walk into one of the fund houses for offline registration, post which, all the transactions can be performed online through their website. If an investor wants to invest in 5 different funds, each from a different fund house, he/she will have to visit 5 different offices. 3. Demat account The investor can directly invest in various funds of different AMCs, corporate bonds, government securities, ETFs, etc through one account. These can be managed from one single location – your Demat Account. However, one needs to pay an additional brokerage charge annually for maintaining the account in addition to the expense ratio (which is to be paid to the AMC). 4. Fintech investment platform These platforms are third-party mutual fund aggregators which aid the investor in investing the corpus after a detailed analysis of their risk profile, goals, investment horizons, and more and suggest the best funds to suit their requirements. They also offer the convenience of managing the investor’s portfolio through their user-friendly sites. Some of the popular firms are Groww, EduFund, Scripbox, FundsIndia, etc. 5. Stock exchanges One can invest through NSE or BSE, hence eliminating all the intermediaries/brokers. However, the investor needs to perform a thorough analysis before investing in any fund and ensure that the objectives of the fund match his/her financial goals, risk appetite, and other requirements. To go through this route, one needs to complete an online registration with NSE or BSE (a one-time process). 6. Registrar and Transfer Agents (RTAs) One needs to complete the application form and submit a bank draft or cheque at the branch office of the RTA post where one can visit any of the RTAs to start investing. Some of the popular RTAs are CAMS and Karvy. This route enables the investor to choose across multiple fund houses (instead of a single fund house – in the AMC route). 7. Mutual fund utilities It is a shared service platform that hosts all the fund houses (owned by several AMCs in the country) and is used for fund transactions. Investors can use this facility online or offline. 8. Investor service centers These are physical offices across the country belonging to RTAs or fund houses. They assist the investor with respect to all the steps in the investment journey – investment to redemption. FAQs What is a Mutual Fund? Mutual funds are investment vehicles that pool money from multiple investors and invest them into equity, debt, other related instruments, and asset classes after thorough research and analysis. Why Should One Invest In Mutual Funds? Mutual funds is the best way to enter the investment market. It helps you invest in multiple companies and the investment strategy is managed by experts. What are the ways to invest in mutual funds? There are many ways to invest in mutual funds: You can invest through an agent, directly with the AMC, through a Demat account, or through a third-party financial investment platform depending upon your goals and ambitions. Conclusion As an investor, you can use any of the above ways to invest in the mutual fund of your choice and enjoy the wealth generation that comes with compounding. You can start your investment journey by downloading the EduFund app and signing up. You can get started immediately and pay zero commissions.
A Guide to Taxation in Mutual Funds!

A Guide to Taxation in Mutual Funds!

In the early article, we discussed financial planning. In this article, we will try to under the taxation in the mutual fund system that applies to mutual fund investments.  Factors determining the taxation of Mutual funds  To know the taxation structure, first, you need to identify which type of mutual funds you have invested in and whether the fund you hold is an equity mutual fund or a debt-oriented mutual fund.   Along with this, the type of income that you are generating from the fund, whether a capital gain or dividend income - both these types of income are taxable in different ways.  Finally, your holding period is crucial in knowing the taxes applicable to your mutual funds' portfolio.  Earnings in mutual funds There are usually two ways in which money is earned in mutual funds: one through the selling of the mutual fund (capital gain) and the other through dividend income.   For example, if you are holding units of a mutual that you purchased at a NAV (Net Asset Value) of Rs. 100, and you sell it when its NAV of Rs. 150, you make a capital gain of Rs. 50; it is worth noting that capital gains tax accrues on the mutual funds' units only after redemption.   The tax will be payable when you file your income tax returns for the coming fiscal year.  The second way to earn from mutual funds is dividend income – the fund declares dividends for the holders based on the surplus that it has for distribution Dividends are taxable as soon as the dividend amount hits the bank accounts of the investors.   Source: Pexels Tax on capital gains  Here, there are again two parts to the story – whether the realized capital gains have come from equity mutual funds or debt mutual funds.   An equity mutual fund has an equity exposure of greater than 65%. For equity mutual funds, if the gains have been realized within 12 months of holding, then the applicable tax rate is flat at 15% on the gains (irrespective of your income tax bracket).   When the holding period exceeds 12 months, the capital gains of Rs. 1,00,000 are exempt from taxes. Any amount upwards of Rs. 1,00,000 is taxable at 10%, along with the provision of indexation benefits.  For debt mutual funds (funds with greater than 65% exposure to debt instruments) - the holding period is considered short-term if it is less than 36 months; anything more than that is long-term.  For the short term, the tax rate is in accordance with your income tax slab. On the other hand, for debt funds held for more than 36 months, the gains are taxable at a flat rate of 20% post-indexation (plus, some cess and surcharge are added).  A possible third case is hybrid funds (funds with a mix of debt and equity) it is simple, their tax treatment is supposed to be on the basis of the fund's exposure to debt and equity.  If the hybrid fund is equity-focused: LTCG is charged at 10% on capital gains exceeding Rs. 1 lakh (without indexation), and STCG is charged at 10%. If the hybrid fund is debt-focused: LTCG is charged at 20% with indexation benefits, and STCG is charged per income tax slab.  Tax on dividends  Now, when it comes to taxation of dividends paid out on mutual funds, it is done by adding the dividend to the investor's taxable income, and then the individual income tax slab rate is applicable; this is in accordance with the amendments made by the union budget of 2020.  Earlier, dividends were tax-free in the hands of investors since the companies paid the Dividend distribution tax (DDT) before sharing the profits with the investors.   Dividends (received from domestic companies) of up to Rs. 10,00,000 per year were tax-free in the hands of the investors during this period. Dividends above Rs. 10 lakhs were subject to a dividend distribution tax of 10%.  STT Aside from the dividends and capital gains taxes, there is also a securities transaction tax (STT).   When you acquire or sell mutual fund units of an equity or a hybrid mutual fund, the government charges an STT of 0.001%. It is important to note that selling units of debt funds are exempt from the STT.  Important points to note  There are tax-saving equity funds as well. Investments made under the ELSS (Equity-linked savings schemes) qualify for tax exemption under section 80C of the Income-tax Act (exemption up to Rs. 1,50,000).   Please note that ELSS schemes come with a lock-in period of 3 years – that is, investors cannot redeem the units before three years. LTCG (long-term capital gains tax) is not applicable for gains up to Rs. 1,00,000.   For LTCG more than Rs 1 lakhs, the applicable tax rate is 10% without indexation.  Taxation in the case of SIP (Systematic Investment plans)  Let us understand this with the help of an example  An investor invests Rs. 10,000 every month from April 2021, and another investor invests Rs. 60,000 lump sum at the same time.   When both of them redeem their funds simultaneously, Rs. 10,000 will qualify for tax exemption for the SIP investor because the investment made in 2021 would exceed one year as of May 2021. In contrast, the entire capital gain isn’t taxable for the lump sum. Investing in the long term can be more tax-efficient than holding the units for a short duration. FAQs How much amount is taxed in mutual funds? If the investor claims redemption in less than 1 year of investment, it would fall under the Short-term Capital Gains (STCG) category. The tax rate would be 15% on the gains earned by the investor. If the investor holds the investment for more than a year, (say April 2020 – May 2021), the gains would be taxed at long-term capital gains (LTCG) tax of 10% Is SIP in mutual funds taxable? Yes, SIP in the mutual fund is taxable. The tax amount differs based on the duration and returns generated Which mutual funds are tax-free? Profits from the sale of ELSS fund units are considered long-term capital gains and have tax exemption. Consult an expert advisor to get the right plan for you TALK TO AN EXPERT
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