Dhaval Kapadia, Director, Portfolio Specialist, Morningstar Investment Adviser (India) answers queries in The Financial Express, from where the below has been taken.
I want to invest Rs 1,000 every month for 10 years in SBI Gilt fund.
Is it tax-free and how much of a return can I expect?
- K S Rao
Gilt funds invest in securities issued by the central and state governments. Returns from debt funds, including gilt funds, are normally composed of interest accrued or yield on instruments held and any capital appreciation or capital loss.
Capital appreciation or capital loss occurs due to movements in bond prices which are inversely related to interest rates. Hence if interest rates rise, bond prices would fall and vice-versa, with longer maturity bonds being more sensitive to movements in interest rates vis-à-vis shorter maturity bonds.
Gilt funds tend to hold medium to longer maturity papers, hence a larger proportion of their return is generated from capital appreciation or capital loss. Returns from gilt funds aren’t assured and vary based on the prevailing interest rate cycle and fund manager’s skills.
From a taxation perspective, short-term capital gains from debt funds (on units held for 36 months or less) are taxed based on the investor’s income tax bracket, whereas dividends are taxed at 28.84%.
Long-term capital gains from debt funds, including gilt funds, are taxed at 20% with indexation benefit.
