Need cash? Don’t redeem all your units

Need cash? Don’t redeem all your units

Source: timesmoney

If you need cash and want to draw it from your mutual fund investment, you don’t have to redeem all your units. Here’s how you can calculate the exact number of units you should encash.


Deepa Srivastava (name change), an employee with a multinational company, needed Rs 10,000 for her vacation. She did not have the cash since all her money was invested. She decided to break one of her mutual fund investments to meet this payment.
She had invested in a diversified equity scheme of ABC Mutual Fund about 3 months back. Her investment amount was Rs 50,000 for which she had received 1960.784 units (her purchase NAV was Rs 25.5 per unit). She pulled out her account statement and ticked on the ‘Redeem all my units’ section. Three days later she received her redemption proceeds – Rs 77,500 (the redemption NAV was Rs 39.525). Now, since she needed only Rs10,000. The balance simply languished in her savings bank account. What Deepa should have done was redeem only to the extent of money she needed for her vacation and for the tax due on the capital gains accrued on redemption. Here is a guide on redemption for Deepa and you.

Redeeming an equity fund held for more than a year

If you are redeeming an equity fund, which you have held for more than one year, there is no tax due on the capital gain. You should simply redeem the number of units that will get you the amount you need, plus the Securities Transaction Tax (STT) due on redemption. Presently, STT at the rate of 0.25 per cent is due on the redemption of equity funds. In Deepa’s case, since she needed Rs 10,000, she should have redeemed units worth Rs 10,025 (Rs 10,000 needed by her + Rs 25 (Rs 10,000 x 0.25 per cent) for STT). This means she should have redeemed only 253.636 units to receive this amount (253.636 units x Rs 39.525, which is the redemption NAV).

Redeeming an equity fund held for less than a year

If you are redeeming an equity fund, which you have held for less than one year, you have to pay tax on the capital gain and STT on the redemption amount. If surcharge is applicable to you (surcharge is applicable if your total income in the year exceeds Rs 10 lakh), the applicable tax rate is 11.22 per cent (10 per cent income tax + 10 per cent surcharge + 2 per cent education cess). If surcharge is not applicable to you, the tax rate will be 10.2 per cent (10 per cent income tax + 2 per cent education cess). When redeeming your units, you should consider the tax payment due so that you don’t run short of cash.

Now, if surcharge is applicable to you (where the tax rate applicable to you is 11.22 per cent), the cash you receive in your hand will be after tax and after STT. Let’s take Deepa’s example to understand this. Deepa’s redemption NAV is Rs 39.525 and her purchase NAV is Rs 25.5. This means that her capital gain per unit is Rs 14.025 (Rs 39.525 – Rs 25.5). On this, she will pay tax at 11.22 per cent i.e. her tax amount per unit will be Rs 1.573 (Rs 14.025 x 11.22 per cent). This means Deepa will get Rs 37.854 per unit after payment of tax (Rs 39.525 (redemption NAV) – Rs 0.098 (STT) - Rs 1.573 (capital gains tax)). To find out how much she should redeem to also take care of the tax due, Deepa should simply use the formula: Cash amount needed x Redemption NAV after STT / Amount per unit after tax. Deepa will need to redeem units to the extent of Rs 10,415.54 i.e. Rs 10,000 x 39.427 (i.e. 39.525-0.098) / 37.854. The number of units Deepa will have to redeem will be 263.518 units (Rs 10,415.54/39.525 (Redemption NAV)).

Redeeming a debt fund held for more than a year

If you are redeeming a debt fund, which you have held for more than one year, you have to pay tax on the capital gain at 10 per cent without indexation of the cost (indexation means increasing your purchase cost for inflation. The government publishes a ‘cost inflation index table’ which gives the inflation number each year to help you compute this) or 20 per cent with indexation, whichever is lower. Let’s go back to Deepa’s example to clarify this.

If Deepa is redeeming a debt fund, which she has held for more than one year and she has made a gain of Rs 14.025 per unit (Rs 39.525 (redemption NAV per unit) – Rs 25.5 (cost per unit)), and if surcharge is applicable to her, the tax rate to compute tax on gain without indexation is 11.22 per cent. It would be 10.2 per cent if surcharge was not applicable to Deepa. Therefore, tax payable by her in the ‘non-indexed’ situation is Rs 1.574 per unit (Rs 14.025 x 11.22 per cent). Deepa had invested in the fund in the financial year 2000-01 for which year the cost inflation index number is 406. For the financial year 2006-07 when she redeems her investment, the cost inflation index number is 525. To increase her purchase cost by inflation, she has to multiply her purchase cost by the cost inflation index number of the year of redemption i.e. 525 and divide by the cost inflation index number of the year of purchase i.e. 406. Deepa’s inflated purchase cost is Rs 32.974 (Rs 25.5 x 525/406). Therefore, Deepa’s indexed gain is Rs 6.551 (Rs 39.525 – Rs 32.974 (inflated cost)). On this, the tax rate applicable to Deepa is 22.44 per cent (20 per cent income tax + 10 per cent surcharge + 2 per cent education cess) since surcharge is applicable to her. If surcharge was not applicable to her, the tax rate would be 20.4 per cent (20 per cent income tax + 2 per cent education cess). Therefore, tax payable per unit is Rs 1.47 (Rs 6.551 (indexed gain) x 22.44 per cent). Since Rs 1.47 is lower, i.e. taking the indexed gains option results in lower tax, Deepa will choose this. Therefore, she will receive Rs 38.055 per unit after tax (Rs 39.525 (redemption NAV per unit) – Rs 1.47 (tax per unit)). Now, Deepa has to simply use the formula stated in ‘Redeeming an equity fund held for less than one year’ to find out how many units she needs to redeem to take care of her cash need as well as tax. The redemption value including tax will be Rs 10,386.28 and the number of units Deepa will have to redeem is 262.777.

Redeeming a debt fund held for less than a year

If you are redeeming a debt fund, which you have held for less than one year, you have to pay tax on the capital gain at the personal tax rate applicable to you. For instance, if you fall in the highest tax bracket of 30 per cent and surcharge is applicable to you, you will have to pay tax at 33.66 per cent (30 per cent income tax + 10 per cent surcharge + 2 per cent education cess). You can use the same computations as shown above under ‘Redeeming an equity fund held for less than one year’.

End note

It is important that you make and break your investments after due thought and consideration. Any decision made in haste usually leads to waste. - Before you redeem your mutual fund investment, work out how many units you should redeem to get the amount you need plus the tax payable on the units you have redeemed, if any.- This will help you avoid excessive redemption which will result in you holding cash that does not earn returns.- Tax aspects for equity and debt funds are different. They are also different for investments held for less than 12 months and more than 12 months.- For this calculation, you will need to know the purchase and redemption NAVs of your units and the period for which you have held your units.