Much talked New Direct Tax Code has hit very badly to mutual fund investors and mutual fund houses. ELSS and Dividend were two of the few better aspects of mutual fund investing are now history. Let us see in details each one of them.
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.