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Fixed income part for people in highest tax bracket
Main Post:
Hi guys,
I have been reading through the posts in this community for quite some time now and have found them to be super helpful.
I have been investing in equity for about 4 years now and have a 8 digit portfolio, thanks to regular investing and sitting on my hands in situations like March 2020 and even summoning courage to put in more.
I have a 60:40 equity to debt portfolio right now. I am pretty comfortable with the equity part as that’s mostly ETFs and index funds.
What I have had a hard time understanding is the fixed income part of the portfolio. I have looked at all options and considering I fall in the 30% tax bracket I am having a hard time finding places to put the debt part of my portfolio. PPF is one obvious thing that I max out every year.
Other than that though the return on FDs and even ultra short debt funds is somewhere between 3.8 to 4.2% right now. Which is too low. So here are my questions:
- Am I missing some instrument or due to the present market conditions there is no other option than to put money in ultra short funds and sit tight until the interest rates rise and the indexation benefits kick in.
- Am I looking at the whole debt part in a wrong way. What I mean by that is that the purpose of debt is to balance out volatility in equity and what matters is that during market conditions like what we have now debt will inevitably give low returns. But when market deteriorate as interest rises debt will balance out the downfall in equity. And hence looking for returns in debt in today’s market conditions without taking unnecessary risk with it is pointless?
If you guys can share how you look at the debt portion in your portfolios and your opinion on the above points it will be super helpful.
Top Comment: You are missing one technique which may work to your advantage. But then I am no analyst or investment advisor so do your math Look at bonds traded in the capital market. Specially the tax free ones , with shorter maturity 1/3 years They will typically offer a YTM of 4.5 % tax free and quote at a premium to issue price . Say a 1000 rupee bond will be 1200. Buying the bond and holding it to maturity Means you get the tax free YTM and book a long term capital loss , that you can set off against capital gain or carry the losses for 7 years to set off against future long term capital gains . Or STCL against STCG.
Fixed Deposit with a tax on interest VS liquid fund with the expense of hiring CA to file return.
Main Post:
As far I understand with my limited knowledge that Liquid funds (with some risk) are better than fixed deposits because of little better returns and overall you pay less income tax if you hold it for more than 3 years.
But if we withdraw money from liquid funds before 3 years, we might get some capital gain and we will need the help of CA to file Income tax return for that if it comes under our tax bracket, and CA usually charger higher to file return in this case.
It could be possible that even the capital gain can be lower than what you pay to CA to file IT return. And I think in case of show and fill interest earned on Fixed Deposit, won't be charged extra by CA like they do for LTCG/STCG
Then why Liquid fund is recommended over the Fixed deposit and also a better option to park emergency money?
Top Comment:
How much does a CA charge to file ITR-2?
It'd vary from CA to CA, city to city, and person to person. If I go by rates mentioned on ClearTax, it's about 3k per ITR-2 filing.
If you don't go with ClearTax, it's possible you've a good business relationship with a local CA. Assuming you have him on a retainer for tax return filing for everyone in your family who has to file returns with taxable income, you might actually get him cheaper per ITR, compared to ClearTax billing.
But let's go with 3k.
I'm assuming that you can file ITR-1 on your own, to keep the difference higher (if you use a CA to file ITR-1, which would cost about 800 INR on ClearTax, then cost of ITR-2 filing is actually lower by 800 INR).
Now imagine you're setting aside x INR, and deciding if to put it in FD or Liquid Fund. Then all it has to is save you equal to or more than 3k in TDS, and find x for that amount.
It should be noted, that in MFs, unless you withdraw something, you don't have to declare those in returns. So you won't be on the hook for filing ITR-2 for just investing in an MF.
At prevailing rates, most 1 year - 2 year FDs are at about 5.5%-6% from big reputed banks. It takes capital of ~5L to generate ~30k in interest income in a year, which can lead to a TDS of 3k.
Yes, per new rules, no TDS till interest income crosses 40k with a single bank across all time deposit accounts.
Does this mean you can save 3k in CA fees, if you always choose FDs over Liquid or Overnight funds, for any amount below 5L?
No!
Because you probably also have other transactions in a year. In equity, you might want to do tax-gain harvesting to save a tax of up to 10k / year. You might want to book some losses to offset with gains in a future financial year. Or, you might just have to rebalance your portfolio, where every switch would be taxable transaction.
Basically, if you're on this sub, and take investing a bit more seriously; chances are, you're probably doing a lot of ITR-2 reportable transactions in a year.
But let's say you're not a savvy investor, and you fear equity. You only want to park some cash - is it better to just go with FD then?
It might be, except you won't get to claim indexation benefits after 3 years.
Fine, but what about short-term parking of cash below 5L? Does a bank deposit have an edge over Liquid / Overnight funds, to help you avoid CA fees?
Still no.
Because you can report those transactions as "Income from other sources" in ITR-1, and pay 30% tax. To the income tax, it's a distinction without a difference. You pay 30% tax on the gains, whether you report it in ITR-2 or ITR-1.
But won't it be better if you take the time to learn ITR-2 filings yourself, if you have narrow use-case like this?
If avoiding paying a CA is the target, there are easier ways to go about it.