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Income Fund : Basics, Things to consider and More

Updated on: Jan 11th, 2022


8 min read

Income funds mainly focus on generating regular income for the investors by investing in high dividend-generating stocks, government securities, certificate of deposits, corporate bonds, money market instruments and debentures. We have covered the following in this article: This article covers the following:

Budget 2021 update: It has been proposed to exempt the senior citizens from filing income tax returns if pension income and interest income are their only annual income source. Section 194P has been newly inserted to enforce the banks to deduct tax on senior citizens more than 75 years of age who have a pension and interest income from the bank.

How do Income Funds work?

The Net Assets Value of an income fund is calculated up to 4 decimal points. Income funds attempt to deliver returns both in declining and rising interest rate scenarios by active management of the portfolio. They may follow either of the two strategies:

  • Generate interest income by holding the instruments until maturity
  • Manage gains by selling them in the debt market if the price of the instrument goes up high.

The fund manager aims to deliver higher returns which have higher stability by allocating towards debt and money market instruments which are investment grade and have relatively low levels of interest rate risk. Historically, income funds have found to generate higher returns than conventional bank fixed deposits. Unlike the lock-in period in an FD, income funds offer greater flexibility of redemption and withdrawal.  

Who should Invest in Income Fund?

Income funds are best suited for those investors who wish to have a regular and stable income. This type of fund carries less risk concerning default. For example, a person who retired from the job will need money for his day to day expenditure, will prefer income fund in comparison to all other funds. Conservative investors who want to earn better returns than their conventional havens may think of income funds.

Things to consider as an Investor


Income funds are highly susceptible to interest rate risk and credit risk. A steady increase in interest rates may lead to a fall in the underlying bond prices, which in turn would lead to falling in the fund value. Moreover, there’s always the risk of a bond issuer defaulting on making a promised payment, which might affect the fund returns. Additionally, to generate higher returns, the fund manager may invest in securities of lower credit rating, thereby increasing the overall portfolio risk.


Income funds can be a great way to make higher returns by taking advantage of interest rate volatility. Primarily, in the scenario of falling interest rates, income funds can deliver relatively higher returns in the range of, say, 7%-9%. Instead of investing your money in regular bank fixed deposits (FDs), you may think of income funds as an efficient alternative. However, be prepared to bear the additional risk as there are no guaranteed returns in income funds.


Income funds charge a fee to manage your money called an expense ratio. Till now, SEBI had mandated the upper limit of expense ratio to be 2.25%. Considering the lower returns generated by income funds as compared to equity funds, a long-term holding period would help in recovering the money gone out by way of the expense ratio.

Investment Horizon

income fund

Investors who have an investment horizon of 1-3 years may consider income funds to invest their short-term surplus funds. You need to time your entry and exit properly to get the maximum out of these funds. The ideal time to enter would be at lower interest rates and exit as the interest rates start rising. If you are planning to keep your funds in the long-term FDs, then income funds would be a better alternative.  

Financial Goals

Income funds, as the name suggests, invest in high-income generating securities which are ideal for supplementing your current income. Retirees may invest in income funds to get extra money apart from their regular pension. If you have a short-term goal of funding your EMI or planning for higher education, these funds can help you achieve these goals. These funds are very flexible as they provide options such as SIP, STP, and SWP.

Tax on Gains

When you invest in income funds, you earn capital gains which are taxable. The rate of taxation is based on how long you stay invested in an income fund called the holding period. A capital gain made during a period of fewer than three years is known as a Short-term Capital Gain (STCG).

A capital gain made over a period of three years or more is known as Long-term Capital Gains (LTCG). STCG from income funds are also added to the investor’s income and taxed according to his income slab. LTCG from income fund is taxed at the rate of 20% after indexation and 10% without the benefit of indexation.

How to invest in Income Funds?

Investing in income funds is made paperless and hassle-free at ClearTax. Using the following steps, you can start your investment journey:
Step 1: Sign in at
Step 2: Enter your personal details regarding the amount of investment and period of investment.
Step 3: Get your e-KYC done, it takes less than 5 minutes.
Step 4: Invest in the most suitable debt fund from amongst the hand-picked mutual funds.

Top 5 Income Funds in India

While selecting a fund, you need to analyse the fund from different angles. There are various quantitative and qualitative parameters which can be used to arrive at the best income funds as per your requirements. Additionally, it would help if you keep your financial goals, risk appetite and investment horizon in mind.

The following table represents the top five income funds in India based on the past five-year returns. Investors may choose the funds based on a different investment horizon like three years returns. You may include other criteria like financial ratios as well.

Fund Name
1 year 3 year5 year
SBI Regular Savings Fund7.24 8.559.98
Aditya Birla Sun Life Treasury Optimizer Fund6.98 8.439.54
Franklin India Income Builder Fund8.06 8.259.09
ICICI Prudential Banking & PSU Debt Fund7.07 8.738.99
Axis Regular Savings Fund7.98 8.5 8.87

*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.

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Quick Summary

Income funds focus on generating regular income by investing in various assets. They can offer higher returns than bank fixed deposits. Best suited for retirees and conservative investors, income funds are also exposed to interest rate and credit risks. Investors need to consider the costs, investment horizon, financial goals, taxation on gains, and how to invest in income funds efficiently.

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Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

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