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  • Tax Saving Mutual Funds

  • Tax Saving Mutual Funds
    Tax Saving Mutual Funds

    Investments in mutual funds are very popular now. They offer investors the chance to harness the skill and knowledge of trained professionals to manage their investments in various instruments. They also offer better returns than other traditional modes of investment like fixed deposits. The way mutual funds do this is buy collecting money from multiple investors and investing it in a balanced way in places like the debt market or in equities. The funds also offer investors choices in investment where they can choose open or close ended schemes, or specialty funds or combinations of these. They can even choose to invest in the mutual fund that offers them the best chance for achieving their goals. This can be done by investor by choosing the risk that they are willing to take with their investments. Typically, high risk investments will provide high returns, medium risk investments will provide medium returns and low risk investments will provide low returns but will be the safest to invest in when it comes to protecting the principal.

    Making the investment and enjoying the returns is very attractive indeed but what happens to the taxes that investors pay on their income? Do they get any tax benefits out of investing in mutual funds? The answer is yes, if the investment is made in tax saving mutual fund. These funds get tax benefits under section 80C of the IT Act.

    What are Tax Saving Mutual Funds

    Tax saving mutual funds are just like any other mutual funds with the added bonus that investments made in them are eligible for tax benefits under section 80C. Most of the tax saving mutual funds are ELSS schemes and make investments in equity markets.

    How do Tax Saving Mutual Funds work

    When an investor invests their money in mutual funds, the funds are added to the pool. The funds are then invested in the equity markets in such a way that even if one investment incurs losses, the other investment manage to mitigate the loss. For example, the breakup of an invest in a particular fund may look like:

    • Automotive industry 6.56%
    • Banks 17.56%
    • Consument durables 5.34%
    • Consumer non-durables 5.66%
    • Power 5.92%
    • Software 8.93%
    • Pharmaceuticals 9.99%

    This means that 6.56% of the invest will be put in the automotive industry and 17.56% in banks and so on.

    ELSS schemes tend to come with a lock-in period of 3 years, which means that the investment cannot be withdrawn for till the end of that time. If the investment is being made in monthly instalments (SIP) then the lock-in period for each instalment is 3 years. For example, if the first investment was made on the 1st of Jan 2015 and the second one on 1st of February 2015 then on the 1st of January 2018 ONLY the first instalments will get unlocked. The second instalment will remain locked till the 1st of February 2018.

    When it comes time to withdrawals, investors can see how many units have gotten unlocked and redeem them at the current NAV. The NAV (Net Asset Value) is the amount you will get for each unit. To make withdrawals, you will need to know the number of available units and submit a claim form to the mutual fund provider. They will credit the amount to your account as soon as it is processed.

    Types of ELSS

    There are two types of schemes under these mutual funds. One is the dividend scheme and the other is the growth scheme. The difference between the two is that in the dividend scheme, if the fund announces dividend then investors get an extra income based on those dividends. These dividends are not subject to tax or lock-in periods and can be withdrawn or reinvested in the fund and will become eligible for tax benefits. There are no such provisions under the growth schemes.

    Features of Tax Saving Mutual Funds

    • If you can't afford to put in large sums to invest then the investing in ELSS can begin with Rs. 500 and has no upper limit, unlike PPF and NSC.
    • While there is no upper limit, only investments worth Rs. 100,000 will be eligible for tax benefits.
    • Investments made in tax saving mutual funds come with lock in periods of 3 years.
    • As a result of being mutual funds these investments come with an inherent risk factor which can either low, medium or high based on where the funds are invested.
    • Typically, tax saving mutual funds are ELSS' (Equity Linked Savings Schemes) and open ended.
    • These mutual funds also offer nomination facilities.
    • Many of the ELSS schemes will feature entry and exit loads. These are the fees paid to the mutual fund providers.

    Benefits of Tax Saving Mutual Funds

    There are lots of benefits to be gain from investing in a tax saving mutual fund. These are some of them:

    • The first and most obvious benefit is that the investments are eligible for tax benefits up to Rs. 1.5 lakh.
    • The second benefit is that long term capital gains are not taxed.
    • Investments in these funds can be made as a means to plan for future expenses like buying a car or paying the down payment for a house.
    • These plans allow investors to invest on a monthly basis via an SIP (Systematic Investment Plan) thereby negating the need to invest in one go.
    • The funds are not invested in one place; the portfolios are kept diverse so as to minimise the risk of massive losses.
    • If you choose not to withdraw the investment, it will continue to grow and turn into savings for a rainy day.
    • While you may not be able to withdraw the principal, you can withdraw the dividends earned, even during the lock-in period.
    • While other investments offer lock-in periods of 6 to 15 years, these mutual funds tend to offers only 3 years of a lock in period.
    • Since these schemes are open ended, investments in them can be made all year round.
    • The particular fund that an investor invests in is run by a qualified funds manager thereby negating the need for investors to have knowledge of the markets.

    Tax saving mutual funds ELSS Vs PPF, NSC and FD

    Mutual Funds Public Provident Fund National Savings Certificates Fixed Deposits
    Minimum investment Rs.500.00 Rs.500.00 Rs.100.00 Rs.100.00
    Maximum investment Unlimited Rs. 1.5 lakhs per year Unlimited Determined by bank
    Returns Not guaranteed Guaranteed Guaranteed Guaranteed
    ROI Determined by the market situation 8.70% per annum (approximate) 8.50% per annum (approximate) Up to 9% per annum
    Income tax benefit Yes Yes Yes Yes
    Tax on returns None for long term capital gains None Yes Yes
    Safety Risky Safe Safe Safe
    Lock in period 3 years 15 years 6 years None
    Premature withdrawal Not allowed Partial withdrawal after 6 years Not allowed Allowed with penalty

    While investments like PPF, FD and NSC may offer a safe environment to invest in, the returns from these investments are limited due to the fixed interest that it can earn in a year. With mutual funds, there may be a risk to the investment but they offer the shortest lock-in periods and the best returns because if the markets do well and the economy progresses, the returns also improve.

    Top 10 Tax Saving Mutual Funds in India

    Fund Name 1-Year Returns 3-Year Returns 5-Year Returns
    Principal Tax Savings Fund 13.5% 13.9% 20.75
    IDFC Tax Advantage (ELSS) – RP (G) 20.2% 12.6% 21.4%
    ABSL Tax Relief 96 – Direct (G) 20.1% 14.0% 23.0%
    L&T Tax Advantage – Direct (G) 13.2% 14.3% 19.7%
    HDFC Long Term Advantage (G) 10.3% 11.9% 17.5%
    DSP BlackRock Tax Saver Fund – Regular (G) 7.6% 12.2% 19.5%
    Kotak Tax Saver – Regular (G) 4.8% 8.7% 16.3%
    Invesco India Tax Plan – DP (G) 18.0% 13.4% 22.1%
    Reliance Tax Saver (ELSS) (G) 0.7% 6.2% 19.4%
    UTI LTEF (Tax Saving) – Direct – (G) 8.3% 8.9% 15.0%

    *Data accurate as on May 24, 2018

    Principal Tax Savings Fund: The Principal Tax Savings Fund is an open-ended tax-saving equity scheme offered by Principal Mutual Fund. It aims at building a growth-oriented portfolio of high-quality instruments that generates capital appreciation in the long term via investment predominantly in equities. The fund was launched in January 1996 and is managed by PVK Mohan.

    IDFC Tax Advantage (ELSS) – RP (G): The IDFC Tax Advantage (ELSS) Regular Plan (Growth) Fund is an open-ended tax-saving equity scheme offered by IDFC Mutual Fund. It aims at creating a diversified portfolio that consists of stocks of firms and organisations that have strong fundamentals and are valued reasonably. The investments made under this scheme could either be completely into equities and equity-related securities and up to 20% in money market and debt instruments. The fund was launched in December 2008 and is managed by Meenakshi Dawar and Daylynn Gerard Paul Pinto.

    Aditya Birla Sun Life Tax Relief 96 – Direct (G): The Aditya Birla Sun Life Tax Relief 96 – Direct (G) fund is an open-ended tax-saving equity scheme offered by Birla Sun Life Mutual Fund. It aims at generating capital growth in the long term, and investments are made in equity (approximately 80%), and money market and debt instruments. The scheme was converted to an open-ended scheme in July 1999, and is managed by Ajay Garg.

    L&T Tax Advantage – Direct (G): The L&T Tax Advantage – Direct (G) scheme is an open-ended tax-saving equity scheme offered by L&T Mutual Fund. The aim of the fund is to generate capital growth in the long term via investment in a diversified portfolio that consists mainly of equity and equity-related securities. The fund was launched in January 2013 and is managed by Soumendra Nath Lahiri.

    HDFC Long Term Advantage (G): The HDFC Long Term Advantage (G) fund is an open-ended tax-saving equity scheme offered by HDFC Mutual Fund. It offers tax benefits under Section 88 of the Income Tax Act, 1961, and comes with a 3-year lock-in period. The aim of the fund is to generate capital appreciation via investment mainly in equity and equity-related instruments. The fund was launched in December 2000 and is managed by Chirag Setalvad and Rakesh Vyas.

    DSP BlackRock Tax Saver Fund – Regular (G): The DSP BlackRock Tax Saver Fund – Regular (G) is an open-ended tax-saving equity scheme is offered by DSP BlackRock Mutual Fund. It aims at generating capital appreciation between the medium and long term via investment in a diversified portfolio that consists mainly of equity and equity-related securities of corporates. The fund was launched in November 2006 and is managed by Rohit Singhania.

    Kotak Tax Saver – Regular (G): The Kotak Tax Saver – Regular (G) fund is an open-ended tax-saving equity scheme offered by Kotak Mahindra Mutual Fund. The aim of the scheme is to generate capital appreciation over the long term via investment in a diversified portfolio comprising of equity and equity-related securities. The fund was launched in September 2005 and is managed by Harsha Upadhyaya.

    Invesco India Tax Plan – DP (G): The Invesco India Tax Plan – Direct Plan – Growth fund is an open-ended tax-saving equity scheme offered by Invesco Mutual Fund. It aims at generating capital growth over the long term through investment in a diversified portfolio that consists of mainly equity and equity-related securities. The fund invests across market capitalisation sectors by using the bottom-up approach. The number of stocks invested in through this fund is limited from 20 to 50. The fund was launched in January 2013 and is managed by Amit Ganatra.

    Reliance Tax Saver (ELSS) (G): The Reliance Tax Saver (ELSS) Growth fund is an open-ended tax-saving equity scheme offered by Reliance Mutual Fund. The aim of the scheme is to generate capital appreciation over the long term via investment in a portfolio that contains mainly of equity and equity-related instruments. The fund was launched in July 2005 and is managed by Ashwani Kumar.

    UTI Long Term Equity Fund (Tax Saving) – Direct – (G): The UTI Long Term Equity Fund (Tax Saving) – Direct – Growth fund is an open-ended tax-saving equity scheme offered by UTI Mutual Fund. It invests at least 80% of its assets in equity-related instruments and aims at generating capital growth whilst offering tax benefits under Section 80C of the Income Tax Act, 1961. The fund was launched in January 2013 and is managed by Vetri Subramaniam and Lalit Gopalan Nambiar.

    FAQ’s about Tax Saving Mutual Funds

    1. How do I make payments towards the mutual fund?
    2. Payments towards mutual funds can either be made by cheque or by direct debit. The most convenient option, if you have opted for an SIP, is to go for the direct debit wherein the mutual fund provider will directly debit the SIP amount from your account every month once you give them the permission to perform electronic clearance.

    3. When should I pay for my SIP?
    4. When you apply for the the SIP you will be informed of the dates on which payments can be made. You can select one of those. For example, if you have invested in ICICI mutual funds, you will be able to make the payments either on the 1st of the month, on the 10th of the month or towards the end of the month, based on your convenience.

    5. Is there a minimum investment required for ELSS?
    6. Yes. The minimum investment amount will depend on the mutual fund provider but in general it can be about Rs. 5,000.

    7. What is NAV?
    8. NAV of Net Asset Value is the price of each unit at that date in time. When a request for withdrawal is submitted, the number of units available for withdrawal are multiplied by the NAV and the resulting amount is credited to the investors account.

    9. How is NAV calculated?
    10. The NAV is calculated by subtracting liabilities from the total asset value and dividing it by the number of outstanding shares.

    11. The amount that I got was less than what the NAV promised when I checked the statement. How is that possible?
    12. The NAV can change everyday, therefore, when a request for a withdrawal is made, the NAV taken into account is that of the day that the request is processed and not of the date of issuing the statement.

    13. Does a high NAV mean the fund is good?
    14. No. A high NAV does not necessarily mean that the fund is a good one. A good way to figure out if funds are good or not is to see the historical returns the funds have provided and check its rating with credit rating companies like CRISIL.

    15. Should I invest in a lump sum or in instalments?
    16. That is a choice left to the investor as both styles of investment are allowed in mutual funds. The advantage of investing in monthly instalments is that the risk of loss through market performance can be avoided on the entire investment.

    17. What is the maximum amount that can be invested in these funds?
    18. There is no upper limit on how much can be invested in these funds.

    19. What is the maximum amount that can be withdrawn?
    20. The maximum amount that can be withdrawn is determined by the NAV and the number of units available.

    21. What is the minimum amount that can be withdrawn?
    22. The minimum amount that can be withdrawn may depend on the company offering the fund but it could be about Rs. 1,000.

    23. If I invest Rs. 2 lakhs in a tax saving mutual fund in a year, can i claim tax benefits for the entire investment?
    24. No. You can claim income tax benefits only up to Rs. 1 lakh to 1.5 lakh in ELSS.

    25. How much tax will I have to pay on my long term capital gain?
    26. Long term capital gains from ELSS funds are exempt from taxes.

    27. Can I switch from one fund to another?
    28. Yes, you will be able to switch between funds but only a part of the investment can be switched not the entire amount.

    29. How do I know where the money is being invested?
    30. If you want to know exactly how the money is being investment then you can ask for the portfolio for that particular scheme and it will show you a detailed breakup of what will be invested where. These portfolios are also available on the mutual funds website.

    31. Can I withdraw in the lock-in period?
    32. No. Once an investment is made, it cannot be withdrawn till the lock-in period is over.

    33. Can an NRI invest in ELSS?
    34. Yes, NRIs can also invest in tax saving mutual funds.

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    GST rate of 18% applicable for all financial services effective July 1, 2017.

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