An increasing number of Indian investors are opting for mutual funds due to their tax efficiency and wealth-building capabilities. Not only have they taken center stage as a favored investment instrument, but they can also function as collateral for loans. A loan against mutual funds (LAMF) provides immediate liquidity without disturbing your original investments. This means you can secure the funds you need while still leaving your mutual fund portfolio intact - making a loan against mutual funds an ideal choice. Let’s take you through the details of tax implications of loan against mutual funds in India and also explore how a platform like MyFi can help.

What is a Loan Against Mutual Funds?

A loan against mutual funds (LAMF) is no different than any other loan. The only difference is that your collateral is your fund unit itself. A major advantage would be that you get your required amount and your investments remain intact, i.e., still invested in the market, growing continuously. There are several banks and financial institutions that offer these loans. Platforms like MyFi make it easier to open a credit line of this sort. It can help you understand the nuances of your specific case if you intend to take a loan against mutual funds in India. Fund types and the amount that you can expect to borrow:

• Equity funds: You can borrow up to 50% of the Net Asset Value (NAV).

• Debt funds: Eligible to borrow up to 80% of the NAV.

The best part?

No taxes when you take out the loan.

It makes sense - a loan is a liability, not an asset. Plus, since you’re not selling, there’s no capital gains tax. However, there are still some key factors to consider:

How Does Loan Interest And Tax Work On Mutual Funds?

The tax treatment depends on loan usage:

• For personal use (travel, weddings, medical bills): No tax benefit.

• For business: Interest is deductible as a business expense.

• For buying a house: May qualify for deduction under Section 24(b).

Taxes on Selling Mutual Funds After Taking a Loan

Though taking a loan is tax-free, selling pledged mutual funds later may trigger capital gains tax

A. Tax on Equity Mutual Funds:

B. Tax on Debt Mutual Funds:

It’s important to stay updated with changing tax rules. Experts at MyFi can guide you through the tax implications of loans against mutual funds.

Loan Against Mutual Funds vs. Personal Loan: Which is Better?

Here’s a comparison:

LAMF is cheaper but requires investments. It is the best choice if you want a loan at low interest without having to sell off your assets. A personal loan works if you don’t have funds to pledge.

Going Beyond The Tax Implications - Risks Of Loan Against Mutual Funds

As is with any investment or loan, there are some risks that go beyond the loan against mutual funds tax implications and understanding those in advance is crucial:

• Market Fluctuations: If NAV drops, the lender may demand more security or repayment.

• Loan Default: Lenders can sell your mutual funds, triggering capital gains tax.

• Interest Cost: Even at lower rates, interest adds to expenses.

• Limited Loan Amount: Loan depends on NAV, which may not be enough.

When Should You Take a Loan Against Mutual Funds?

Here are situations where taking a loan against mutual funds makes sense:

• You need money but don’t want to sell investments.

• You can repay comfortably.

• You trust the market to perform well.

• You want a cheaper alternative to a personal loan.

• You’re using the loan for business or tax-saving investments.

Summing Up

Before taking a loan against mutual funds, understand the risks and tax impact and here is a quick recap for you:

• No tax on the actual loan amount.

• Interest may be deductible if used for business or investments.

• Selling pledged units triggers capital gains tax.

• Defaulting can lead to forced liquidation.

MyFi helps you compare lenders, track loan options, and make informed financial decisions. Whether you need a loan against mutual funds or any other financial solution, MyFi ensures transparency, expert advice, and better financial planning.

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FAQs

1. Is a loan against mutual funds better than a personal loan?

Yes, because it has lower interest rates. But the amount you get depends on your mutual fund value.

2. Can I take a loan against any mutual fund?

Not all mutual funds qualify. Banks and financial institutions usually accept equity and debt mutual funds with a high NAV.

3. Does taking this loan affect my credit score?

Yes, if you fail to repay the loan, your credit score can drop.

4. How fast can I get a loan against mutual funds?

Faster than personal loans since you’re providing collateral.

5. Are there any hidden fees?

Lenders may charge processing fees, prepayment charges, and interest costs. Always check the terms before borrowing.