Tax free income threshold going up from Rs. 7 lakh p.a.to Rs. 12 lakh p.a. from FY25-26 has opened up a world of opportunities for investors, distributors and the MF industry.
Capital gains from debt funds continue to be taxed at marginal rate of tax – but when the marginal rate of tax becomes 0% for upto Rs. 12 lakhs of income, there’s a lot of room for tax planning in most business and HNI families.
For families who are advised by their CAs to create income tax files in the names of all non-income earning members of their household and also set up an HUF, the advantages of gifting such individuals a corpus and investing in debt funds has now become a lot more attractive than traditional fixed income instruments.
To get to Rs. 12 lakh of income, a person without taxable income can invest say Rs.1.5 cr in a traditional debt instrument. But if you choose to invest in a debt fund and set up an SWP, you can either generate the same Rs. 12 lakh of cashflows and have only a fraction of it added as income or you can invest a lot more than Rs. 1.5 cr, generate proportionately larger cashflow and still stay within Rs.12 lakhs of taxable income, which will be tax free.
Tax deferment is a powerful tool that debt funds offer which no traditional fixed income instrument can.
Amar recommends funds like the ICICI Prudential All Seasons Bond Fund or their Corporate Bond Fund as ideal vehicles for such tax planning using debt funds.
MFDs should consider this prospect: what if they were to pick up their phones now and call their clients with this opening line: “How would you like a 7-8% tax free return idea?”. You know your clients would be very keen to hear you out.
There is a huge opportunity for MFDs to proactively reach out to your clients now, explain how debt funds can now get a lot more of tax free income into their households, and potentially move sizeable chunks of household money invested in traditional debt instruments into debt funds. It’s a win for your clients, for you as distributors and for the MF industry!
Act now – before clients start their annual tax conversations with their CAs in May-June, as every CA will undoubtedly have such conversations and make their own recommendations – which may perhaps not be as smart as yours!