Should I invest surpluses in SBI Savings Fund

Great to hear that you want to start investing in mutual funds.

Yes, you can park the investible surpluses in SBI Savings Fund and use this like a savings bank account. That means whenever you have surpluses, you can invest and redeem whenever required.

However, please note that you should not invest in any of the dividend options of these funds even though the dividends received in your hand is tax free! the reason being, dividend distribution tax (DDT) @28.84% is payable on dividends distributed by debt funds.

Growth option may be more suitable to you as you need to pay short term capital gains tax (the rate is applicable based on your current tax bracket) on the profit that you make. However, dividend option is suitable for those in highest tax bracket of 30% !

Let us understand how short term tax is calculated in details -

Units held in debt mutual funds for less than 36 months are treated as short term and taxed according to the income tax slab rate the investor is falling in. Over and above this, 15% surcharge and 3% Cess is also payable. Short-term capital gains is added to the total income and taxed as per income tax slab. In case the total income is less than the taxable limit in a particular financial year, then naturally no tax will be payable.

Example - Assume you have invested Rs 100,000 in a liquid fund @ NAV of Rs 10.50 and got 9523.809 units. You sold the entire units after 12 months @11.25 and got a redemption amount of Rs 107,142.85. Your short term capital gains is Rs 7142.85 ( Rs 107,142.85 - Rs 100,000 ) which will be added to your total income and taxed according to your tax slab. However, in case your total earning (including this short term capital gain) is less than the minimum taxable amount, then you need not pay any taxes.

Hope you could understand the taxation of debt funds for short term investments.

Thanks for writing to us.