Fixed income Fund taxation, how does it affect investors?
Article by: Nipapun Poonsateansup CFP® Independent Finance Planner
The Cabinet agreed to amend the law on taxation at a rate of 15% of investment in debt securities through mutual funds. According to the proposal of the Ministry of Finance on 28 August 2018, how this will affect the investors. Follow up through this article.
First, we should understand the return on investment through bond. If you are an investor investing in bond either or government bonds or debentures, you will get the return in the form of interest. And the interest received is subject to 15% withholding tax. Investors are entitled to choose whether to include interest income in the calculation of income for annual tax purposes.
However, in the past, if investors invest through bond mutual funds, the interest from debt securities invested by the fund will not be subject to withholding tax. Resulting in inequality in the tax system. Investors who invest directly in debt securities will be taxed more than investing through bond funds.
To create fairness, the Ministry of Finance has revised the taxation of investment income in bonds through mutual funds to be equivalent or equivalent to direct deposit or investment in bonds. It is since people are not obliged to perform their legal duties. The fund is required to pay corporate income tax, only in the category of discounted income and income with the same interest. The payer is tax deductible at the rate of 15 percent, or in other words. The issuer of the debt securities that the fund invests in must pay withholding tax on the interest paid out.
Let's compare the investment in debt securities with the investment in bond funds. (Before the law came into force) to visualize.
Mr. Mungkung have invested in government bonds that have a 3% interest per year of 100,000 baht,
so he will earn interest on this investment 100,000 x 3% = 3,000 per year.
But the Mr. Mungkung will be subject to withholding tax at 15%
The net income is 450 baht (3,000 x 15% = 450),
resulting in a net interest income of 3,000 - 450 = 2,550 baht or 2.55%
On the other hand, If Mr. Mungkung invest through bond funds. The bond funds have invested in 3% interest-bearing government bonds, but the difference is in the past, the interest earned on this investment by the Fixed Income Fund will not be subject to withholding taxes. The fund's return on investment is 3%. This is where the Ministry of Finance sees that there is inequality. Because of the amendment of the law, the mutual fund must be subject to withholding tax. And the issuer is obliged to withhold tax from the Fixed Income Fund. This will result in lower return on investment in bond funds.
However, the Revenue Department will issue secondary legislation to exempt corporate income tax from interest earned on debt securities for LTF or Retirement Mutual Funds (RMF) and provident funds. To support the retirement savings of the people.
So, if investors are building long-term retirement portfolios, I recommend invest in bonds through provident fund or the RMF funds instead. But if you want to put the money away or want to do the short-term investment, you still can also be invested in bond funds. Even the return on investment in fixed income funds will be reduced.