Two Purchases, Two NAVs, and a Tax Question
Ms. Nair, a first-time investor, submits an application for ₹1,90,000 in an equity scheme on Monday at 4:30 p.m.; the money leaves her bank on Tuesday and units are allotted at Tuesday's NAV. Later she submits a second application for ₹2,50,000 on a Wednesday at 11:00 a.m.; the cheque clears and the funds are realised by the AMC on Friday. Fourteen months after her first purchase she redeems the entire holding for ₹7,00,000. She asks the call centre why her second purchase got a worse NAV than the day she applied, how much tax she will pay, and whether she should have chosen the IDCW option to get "extra income".
1. Explain, with the applicable rules, why each purchase received the NAV it did.
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Two different rules are in play, and both outcomes were correct.
Purchase 1 - ₹1,90,000, below the ₹2 lakh threshold. For applications below ₹2 lakh, the applicable NAV is that of the business day on which the application is received, provided it is received before the cut-off (3:00 p.m.). Submitted at 4:30 p.m., it missed the cut-off, so the next business day's NAV - Tuesday - applied. The fact that the money also moved on Tuesday is irrelevant here.
Purchase 2 - ₹2,50,000, at or above ₹2 lakh. For ₹2 lakh and above, the NAV is that of the business day on which the funds are realised and available for utilisation, irrespective of when the application arrived (subject to the application being complete and received before cut-off). Funds were realised on Friday, so Friday's NAV applied - even though the application came on Wednesday.
The lesson to give her: for large purchases, the date the money actually reaches the AMC drives the price, so timing a large investment means timing the transfer, not the form.
2. Compute her capital gains tax on the redemption, stating the assumptions.
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Basis: total cost ₹1,90,000 + ₹2,50,000 = ₹4,40,000; redemption proceeds ₹7,00,000; gain ₹2,60,000. Both purchases were held more than 12 months, so the gain is long term for an equity-oriented scheme (65% or more in domestic equity, STT paid).
Computation:
- Long-term capital gain: ₹2,60,000
- Less annual exemption for equity LTCG: ₹1,25,000
- Taxable gain: ₹1,35,000
- Tax at 12.5%: ₹16,875
- Add 4% health and education cess: ≈ ₹675
- Tax payable ≈ ₹17,550
Assumptions and cautions: the ₹1,25,000 exemption is per person per financial year and is shared with any other equity LTCG she books that year; no indexation is available; rates are as per current provisions, so verify against the law in force in the year of redemption. Had this been a debt scheme bought after 1 April 2023, the entire gain would be taxed at her slab rate with no exemption and no indexation.
3. How should the IDCW option be explained, and what would have changed had she chosen it?
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IDCW is not "extra income"; it is a partial redemption she did not ask for. When a payout is declared, the NAV falls by the payout amount (plus the applicable distribution taxes borne by the scheme), so her capital is smaller by exactly what she received.
What would have changed:
- Her holding would have grown less; the ₹7,00,000 terminal value would be lower by the payouts plus their lost compounding.
- The payouts would have been taxable in her hands as income (slab rates for IDCW in an equity scheme), separately from the capital gains on redemption - so probably more tax, paid earlier.
- She would have had small, irregular cash flows she did not need, which is operationally messy and easy to leave unclaimed.
For an investor with no income requirement and 14 months of accumulation, growth is the correct option. IDCW suits someone who genuinely wants periodic cash flow and understands that it comes out of their own capital.