1. Equity-Linked Savings Schemes or ELSS funds are no longer part of 80C tax savings.

I have never been a fan of Insurance as a mode of investment and has always preferred ELSS funds over insurance which saves me tax and brings me the benefits of equity returns. I am badly hit by this move and so is the ELSS fund houses where they loose their single best USP or Unique Selling Point.

It is not only a hit to the current investors but in the long run this will also restrict the new investors entering into mutual fund market. Many retail investors are attracted to equity market through tax-savings funds. They invest in ELSS funds for the first time and three year lock-in generally ensures good returns. This experience converts many of these investors to investing in equity based mutual funds.

Coming back to 80C tax savings, we are only left with term insurance, Provident Fund (PF), Public Provident Fund (PPF) and the New Pension System (NPS). I think all of the above are crap including NPS which offers some equity (upto 50%) exposure with a lock-in period upto your retirement age.

2. Taxable Dividend

Dividends from mutual funds will be taxable and so now instead of going the dividend way it would be a better strategy now to derive regular income from redemption’s as long as you avoid short-term gains by not redeeming within one year of investing. I think this will make systematic withdrawal plan (SWP) a far more exercised option.

I am not sure why dividend is made taxable but as I read news on the web I get the feeling that it is something to do with ULIP’s but I do not agree on it. I think it is something to do with misuse of dividend. I think misuse is not the right term and “not the right use” will be correct term.

I myself have done lots of things with dividends and one of them is I get Full tax saving without investing complete one lac using dividends and so I am sure there will be many other ways like mine. One of them which I can think of right now is -

Let us say that you invest in a fund 100,000 and you get a dividend of 10,000. Mutual funds announce the dividend date few days in advance. Once you have the dividend you redeem all the amount and the amount will be close to 90,000 and so on books you made a loss of 10k but actually that is not true. I am not sure how this has and was treated but just came to my mind right now.

How this will impact you? Speak your mind out in comments below.

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Share your views on the New Direct Tax Code in comments.

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Neel in one of his comments asked

… Not sure if you have any article which explains Income Tax deduction and other charges involved for non-ELSS MFs. This info would be very helpful.

First for open ended non-ELSS mutual funds there is no time limit  i.e.  you can invest in the fund at any time and redeem the same any time. So assuming there is some gain when you are redeeming your mutual funds you have the following two scenarios.

If you redeem before one year of your purchase date you are eligible for short term gain and so the income is actually added to your other incomes and you pay tax accordingly. Under section 111A, for shares or mutual funds where STT is paid, for Asst Yr 2009-10 the tax rate is 15%.

If you redeem after one year if your purchase date you are eligible for long term gain and as of now ( Before New Direct Tax Code ) equity investment with time frame of more than one year are tax free.

For dividend option the amount you receive as dividend is tax free but for gains we apply the same rules above.

Remember that I am not your tax consultant. You should consult tax expert for calculating your taxable income. I am just providing views about the same and may not cover all areas for calculating the right taxable income for everybody. Still if you have more questions post them in comments.

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What is ULIP?

ULIP stands for Unit Linked Insurance Plan and it is a Life Insurance Plan and the main difference between ULIP and traditional insurance is ULIP has option in the hand of investor to select his risk profile and so returns vary like 100% equity based or balanced or debt etc.

Apart from the fact that you can select your own preferred profile of investment there is a greater flexibility in terms of premium payments which means a premium holiday is possible as well as invest surplus money by way of top ups ultimately increasing your investments.

In 1971 the UNIT TRUST OF INDIA offered first unit linked insurance plan in which out of insurance premium a small part of contribution was utilized for providing life cover and rest was invested in units.

Features of ULIP

Apart from standard insurance features ULIP provides the following added features like

• Investment and savings.
• Equity Linked returns.
• Flexibility in premium.
• Adjustable life cover.
• Tax Benefits.
• Free switches between available investment options.
• No regular premiums after 3 years.
• You can withdraw partially or wholly after 3 years.

Investment Allocation Table

There are several options within a ULIP. you can select the option that best fits in with your risk profile and helps you achieve your investment objective.

The above allocation is done by diversifying your investments into the following category of funds

Disadvantages

1. No guarantee of returns
2. Very high administrative charges. As high as 20% .
3. Past performance may not be the way to judge the returns in future.
4. You may incur losses if you do not do it wisely and keep track of it often.

Remember there is no one on this planet who is going to make you wealthy. You have to be doing it for you and so if you do invest keep track of it always.

If you have more questions post in comments. I will be more than happy to answer them.

According to me Insurance is never an investment and see why here.

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First let’s see what the new code is. Remember this is still not final statement and if it becomes it would be applicable from the financial year 2011-12. Also I have not taken into account all the options and points but mainly those that effect the equity based investment areas and tax.

For an individual, annual income up to

• Rs 1.6 lakh (Rs 160,000) – Tax Free.
• Rs 1.6 lakh and Rs 10 lakh (Rs 1 million) – 10%.
• Rs 10 lakh and Rs 25 lakh (Rs 2.5 million) – 20%.
• Above Rs 25 lakh – 30%.

But this relaxation in tax comes at a price.

It does not distinguish between short- and long-term capital gains from equity market.

So if you have equity holding for more than 1 year you may need to pay the tax on the gains. However, gains made after one year, there may be a factor of inflation to inflate up the cost price of the stock and so your actual return may not be taxable but based on the inflated price of the stock.

Also the proposal of tax saving under 80C may go up from 100k to 300k but then it would not allow any mutual funds to have any ELSS funds and you can save tax only in few worst return areas like PPF.

How New Code Can Impact you?

I think there are 2 side of every coin and so is the case here.

One side is – You may not be forced to invest to save a large chunk of Tax. Why? Because the actual tax saving would be hardly 10% because many people do not fall into the income group of 20% as is the case now.

Now if you fall into the slab of 20% or 30% you will have your employee provident fund which will cover your 80C and so there will be very less for you to actually invest in other options which are anyway going away.

I think this will only benefit people and not harm but yes ELSS fund house will definitely not let it happen because it kills their USP.

So now over to you and so what are your views on the same?

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I am of the camp who believes that Mutual Funds are the best way to save Tax Under 80C and there is no other method that can beat Mutual Fund way of saving tax. You can save your Full tax without even investing one lac. Apart from that the returns are also very attractive. I fight with many colleague on this over a period of time and guess what. I have never lost on a single argument on this.

Government Fixed Deposit / NSC Certificates

If you use Government Fixed Deposits or NSC certificates to save your tax there are many disadvantages and one of them being the interest you get from those NSC certificates is taxable and so the actual return you get on your investment, some goes into Tax. I am not sure of the current interest rate you get but then if its even 8% you will not get full 8% as you will be paying tax.

Insurance

Few of my friends many times argue on the fact that Insurance is the best way of saving tax and not ELSS Mutual Funds and I ask them only 2 questions which answers their own queries.

1. How much of your initial investment is actually invested?
2. Which are the mutual funds where your policy invests? Assume he invests in policy which has some equity exposure.

The answer to first question is always near to 80% which means out of 100,000 of your investment target you only invested 80,000.

The answer to second question is they list me few funds. I tell them invest in those funds directly if they are ELSS funds or choose some other Good Tax Saving Funds. If your policy invests in few selected funds why don’t you do that on your own and save 20,000 Rs. If you want me to suggest few good funds for 20,000 I will give you 50% discount as well. And they do not have anything more to say.

So next time someone asks you about Insurance don’t forget to ask him the above 2 questions and then tell him bye-bye.

80D

Till now I talked about my stories about 80C but have you ever thought about 80D. Section 80D of the Income Tax Act, 1961 allows you to claim tax deductions for Health Insurance taken for yourself and your family, including parents.

So this time don’t forget to see if you need to some health insurance and if yes do save some tax there as well.

Over to you

Do you have your tax saving story to share. We would like to hear it.

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What advice would you give to save more Tax?

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I am 24yrs and would like to invest money which would help me to save tax & get good returns. I am planning to invest 30,000 in ELSS through SIP. How and what do you suggest? Do I first buy for 20,000 and then 1000/month or…? Also what do you think about Can robeco, Sundaram tax saver & quantum tax saver? What should I see, dividend or return before investing?

After suggesting Best Tax Saver Funds on the basis of dividend this is the questions of many readers of my blog asked as to what they should choose, Dividend or Return and so I thought I would write on this and clarify it to an extent I could.

Objective of your investment

You should focus on the objective of your investment. When I do investment in Tax Saving funds My prime objective is to Save Tax and secondary objective is ofcourse to gain some money. So if my prime objective is to save tax I should see how can I save maximum tax with minumum investment. I do so by getting my dividend back which I can use elsewhere.

Now is getting dividend the only objective. The answer is No and so I choose the best Dividend fund and invest in the ones with highest returns among them. Remember that funds give Dividend if they have good returns and if you see the list of best dividend funds you would hardly see any fund which has not given good returns but yes there is no conception without exception and Sundaram Tax Saver Fund is very good when it comes to Return but not when it comes to dividend.

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1. First thing first. You are legally bound to file your tax returns.
2. You may have additional tax to pay for interests you earn from bank accounts which is not handled by your employer.
3. You may need to produce the returns when applying for loan.
4. You may need to produce the returns when applying for Visa.

Now you can also do the e-filling at https://incometaxindiaefiling.gov.in/portal/index.do website and so you dont have to do much apart from few clicks and entering few values. It needs Java in your browser to function properly.

No related posts.

So now using the methods discussed in the above two articles I would list some of the best Tax Saving funds. The list of funds I have selected are based on criteria of consistent dividend for a longer period of time.

Birla Sun Life Tax Relief 96

Best Dividend ever by any Tax saver fund I know off.

Principal Personal TaxSaver

One more best dividend Tax saver fund I know off. Principal Personal TaxSaver has given probably the best dividend in the most difficult time.

SBI Magnum Tax gain

Yet another fund by SBI Mutual Fund house which has very good track record when it comes to return as well as dividend.

HDFC Tax Saver

Not into one of the best dividend rate like above funds but very consistent when it comes to dividend and also return of this fund is also worth investing.

Canara Robeco Equity Tax Saver

Not as good as above ones, but best when it comes to return of the fund.

Apart from the above old funds I also expect some good returns for some of the new tax saving funds which till date have not recorded good dividend but that is may be because of the current market situation for last one year or so and so they deserve mentioning.

Fidelity Tax Advantage

DSP Blackrock Tax Saver

Kotak Tax Saver

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