There is a lot of heat and dust that has been generated over the issue of the taxability of receipt from various retirement planning options and the manner in which this should be structured.
While discussion and comparison of the situation in different areas it is necessary that the individual considers the situation that they would face when they are dealing with a mutual fund.This is essential because there is a different manner in which the details related to a mutual fund are considered. Here is a closer and detailed look at the situation so that one is able to understand the position in a better manner.
Redemption of units
The moment there is a withdrawal from a mutual fund then there is a specific way in which the entire situation would work. Depending upon the amount that is withdrawn the requisite number of units are actually redeemed.
So for example if the net asset value of a fund is Rs 20 and the investor has a total of 3,000 units with them and if a sum of Rs 10,000 has been withdrawn then a total of 500 units will be redeemed.
This means that out of the total holdings just the number that would be necessary for the purpose of ensuring that the required amount of money is generated would actually be touched.
This would result in a position where the remaining units stay invested in the fund and that these remain as they were.
This is a positive thing because the next step that arises would lead to a benefit for the investor in terms of how much they are generating as gains.
No relation with notional gains
These redemption of units needs to be given the highest attention as they have to be separated from the notional gains earned. There could be a situation wherein the investment of say Rs 1 lakh has a notional gain of Rs 20,000 that is present at a particular point of time.
Now the investor might withdraw Rs 10,000 and the question that would arise at this point of time is whether the gain has been withdrawn or is it the investment part that has been taken out and how should one consider the action in terms of this impact.
This becomes important because the tax aspect will be based on what is considered and how much of the gains have actually been generated.
In case of mutual fund units the gains would be proportional and hence the Rs 10,000 withdrawal will have Rs 2,000 of gains present.
The investor would end up being the gainer when it comes to the redemption of the units because on one side just a part of the total proceeds for them would be considered as the gains that would have arisen.
Take the example wherein the investor finds that 500 units are redeemed when she has withdrawn a sum of Rs 10,000.
Out of the total net asset value that comprises this figure a large part would be the cost that has been paid to acquire the units.
When the tax workings are made then the capital gains would ensure that the cost goes out of the equation and due to this reason the gains part of the total amount that has come would not be very high.
At the same time the number of units that are considered for each of the transactions are low and the remaining units remain there untouched which means that there is a chance for these to be held for a longer time period and ensure that there is conversion of the gains to long term capital gains which will lead to a lower amount in terms of the tax bill that would arise.