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Is it advisable for a registered club to invest in liquid or balance funds instead of investing in FD

Is it advisable for a registered club to invest in liquid or balance funds instead of investing in FD. What will be the tax implications in both the cases?

Sep 26, 2016 by Chirag, Panaji  |   Mutual Fund

Please note that, mutual funds are subject to market risks and the risk varies by product categories. While liquid funds are very low risk investments, the same cannot be said about balanced funds (where more 65% of the asset allocation is in equities). You should select schemes based on your investment objectives, risk capacity and investment tenure. Liquid funds can be good alternative investment options to fixed deposits for parking the surplus funds of your club. While liquid fund, unlike fixed deposits, do not assure returns, liquid funds returns are usually quite similar to FD returns (please see Top Performing Mutual Funds - Liquid Funds returns on our website by clicking on the link). Liquid funds are more flexible investment options compared to fixed deposits. Some banks will charge a penalty, if you make a pre-mature withdrawal from your fixed deposit); there are no penalties for withdrawals from liquid funds.

Coming to the taxation aspect, while surplus funds of a registered club is tax exempt due to the principle of mutuality, in our opinion, “income or profits” arising out of your investing your surplus in FD or liquid funds is not tax exempt, because the “income or profit” is arising from a third party (bank, mutual fund etc) and not from the members of the club. However, there are confusing legal precedents on this matter and since we are not legal experts, you should consult with a lawyer, if there is any confusion among members on this matter. If your club is incorporated as a domestic company, short term capital gains from liquid funds (investment held for less than 36 months) is taxed at the domestic company tax rate (30% + surcharge + cess). It is the same for fixed deposits. However, please note that there is no tax deducted at source (TDS) for domestic mutual fund investors (your bank will deduct tax at source for FD interest). Further, please note that, in case you hold mutual fund units for a period of more than 36 months, then your capital gains will be taxed at 20% after allowing for indexation benefits. There is a significant tax advantage for debt mutual funds over fixed deposits, if the holding period is more than 36 months.

From a taxation standpoint, balanced funds (more than 65% invested in equities) are treated as an equity funds. Capital gains from sale of equity fund (including balanced funds) units held for a period of less than 12 months is taxed at 15%. Capital gains from sale of equity fund (including balanced funds) units held for more than 12 months is tax free. Hope this clarifies. Thanks for writing to us.

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