What are the latest capital gain tax rates for mutual funds? There seems to be confusion whether 10% long-term capital gain (LTCG) without indexation is applicable from this financial year. Also, can you please tell me if any calculators are available for calculating the extended internal rate of return (XIRR) for debt funds—with indexation and without indexation?
—Rajan Desai
Capital gains taxation rates are different for domestic equity-oriented funds and other funds. For equity-oriented funds (those that have at least 65% of their holdings in stocks listed in Indian markets), short-term gains (where holding period is less than 12 months) are taxed at 15% and long-term gains are exempt from taxation. For all other funds, including debt funds that you are specifically interested in, capital gains are taxed differently. For such funds, short-term gains (where holding period is longer—it goes up to 36 months) are taxed at the income tax slab rate that the investor belongs to.
For example, if an investor is in the top slab of the income-tax rates (earning more than Rs10 lakh of taxable income during the year), they would be paying 30% tax on their gains. Long-term gains from such funds, though, can take advantage of indexation (increasing the cost of their investment by a published rate that is close to the inflation rate) and reduce the amount of their capital gains. After this reduction has been applied, the investor would need to pay a 20% tax on the reduced gains.
Coming to your question about the 10% rate—this option was available only until a few years ago. However, the Union Budget of 2014 removed this option and gave only the 20% after indexation option to the investors with long-term capital gains from debt funds.
I searched the internet for calculators that would apply indexation and calculate capital gains for a debt fund holding. There are a handful of sites that do that, but none that I found that were both useful and up-to-date. I think you would be better off consulting an informed tax attorney in this regard.
I have been regularly investing Rs10,000 in Axis Long Term Equity Fund ELSS (equity linked savings scheme). Should I continue investing in this fund or stop my investment or redeem my investment? If I should redeem my investment, kindly suggest some other suitable ELSS fund with a stable track record.
—Dr. Nitin Patel
Axis Long Term Equity Fund is a decent ELSS fund and if you already have investment units in the fund, you should hold on to it. This is especially so since this is a tax-saving fund and these units might be under the lock-in period. However, your future tax-saving investments can be made in a different, more promising fund such as Invesco India Tax Plan.
What is the difference between XIRR and compounded annual growth rate CAGR? How do you calculate it? Are there any online calculators?
—Prashant Shah
Both CAGR and XIRR are methods of calculating annualized growth rate of investments, which can then be used to compare the performance of investment products and portfolios across holding periods. Between the two, CAGR is the simpler concept—it applies to the performance of a single investment product where the investment was made on a given start date and redeemed (withdrawn) on a particular end date. Regardless of how far apart the two dates are, a CAGR calculation would tell you what the growth rate per year was if a compounding effect was applied annually. For example, if an investment of Rs1 lakh was made on 1 January 2014, and redeemed on 1 January 2017 at a value of Rs1.6 lakh, the total return would be Rs60,000 or 60%. However, the investment was held over a period of 3 years. So, the annual simple rate of return would be 60% divided by 3, which is 20%. However, a CAGR calculation would give you a rate that would factor in a compounding effect every year. In this case, the CAGR would be 16.96%.
Calculation of XIRR would yield a similar result, but would be applied in situations where the investment scenario is not so straightforward. Typically, investors hold multiple investments in a portfolio, have dividends paid out, make redemptions, make additional investments, etcetera. For such investments and portfolios, a simple CAGR calculation (which only takes start and end values and a specific time period as inputs) would not be possible, and would involve several cash flows, into and out of the portfolio. For such portfolios, XIRR calculations would need to be made to figure out the annualized growth rate of the investments. Googling for ‘XIRR calculator’ yields several results, but the easiest way would be to use an inbuilt function in your spreadsheet application to calculate it.
Srikanth Meenakshi is co-founder and COO, FundsIndia.com.
Queries and views at mintmoney@livemint.com