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.
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{ 28 comments… read them below or add one }
Shabbir,
Can i start (Tax saving) SIPs from this year. Will the DTC which is supposed to be implemented w.e.f 12, cover my investments for ’11-’12? Or the investments for this year will come under the current Tax code itself and DTC will govern the investments one makes from april 12. Please enlighten.
Rajat, This year we have option of ELSS and so go for it. Next year it will be nightmare of taxes for people like us. As of now lot of things are under ifs and buts and so concentrate on ELSS this year.
Hi Shabbir,
For the stocks, though self research is recommended always fro any investor but still if we want to take some external help, from which broking house, research is somewhat trustworthy and you would recommend.
Regards
Raju A
No one Raju. Yes go with your broker’s choice of stock but when to trade should be your call. Let’s say I tell you that I go with Motilal suggests me. They gave me say 3 recommendations but I did not like either and so did not go for any of those.
Maximum limit for all three sections together (70, 71 and 72) is limited to 50000/- under new DTC.
Presently: it is 1Lak+35000 for 80C and 80D and I am not sure tution fee for children are included in 80C. However, tax payers advantage came down from 135000 to just 50K flat!
How come you said increase in Insurance, Shabir? Earlier under Sec 80C one can invest up to 1lakh in either insurance or ELSS and under sec 80D almost 35000/- in health insurnace. So in total tax payers can get tax advantage for 135000. But in DTC, it brought down to Rs. 50000/- (I wonder when you said it is increased?, please explain)
You have mentioned that the same is not going to implemented next year.What does it mean? They continue with EEE regime for insurnace and keep ILakh tax saving limit?
Is it 50k or 150k total?
Right. But the total benefit an investor used to enjoy has been reduced considerably now. Now many will not consider availing this option as the amount one can save is very less. Your tution fees itself will cover up this 50000 limit. You have hardly anything left for getting taxbenefits from life insurance and health insurnace.
Very true but for Insurance it has been increased. Anyway it is not being implemented next year as well and so nothing to worry for one more year.
Shabir,
It is good to share information here. Are you aware that Section 80C itself is not there in the new DTC. Section 80D is also not there instead they have section 70 and Section 71 for life insurnace and health insurance respectively. Under DTC, for both sections and section 72 ( tution fee) the maximum limit kep as 50000/- instead of 135000 (80D and 80C).
This is for your information. Thanks
Yes no matter how you name the section the summary is get insurance.
Shabbir,
i need to invest 45K, can you please suggest me where should i invest? i was thinking to invest in MF, but which? and if DTC applies then should i invest in MF for tax saving purpose or not?
i have 30K in LIC, 25K in PF. Rest is 45K.
Please suggest.
Thanks in advance.
this site is really helpful, you are doing really good job, keep it up.
DTC is not in this Fiscal but next and any best tax saving funds should do.
if i choose growth option in MF, do dividend still be taxable in DTC in next fiscal?
Parag, if you choose growth option you don’t get any dividend.
One seriously hopes that this Congress govt is voted out. This whole Direct Tax Code Crap should be scrapped. Congress wants more money to feed its scams – that is the whole design behind this crappy tax code.
Thanks for the details but these are not the tax savers funds.
I am thinking of investing in Fedielity Tax advantage with a monthly SIP of 2000/month and in Relience Tax saver.
Are these good to go?
Mimi check out best tax saving funds. http://shabbir.in/best-tax-saving-funds/
Can u suggest few which are giving good returns
Check out http://shabbir.in/best-midcap-funds/
Hi,
I want to start my tax planning now. Please advice where to invest money at this point. I am thinking of investing in MF.
Yes you should invest in ELSS funds
I want to know that the Islamic based mutual funds or investment.
Thanks Shabbir.
This means I can keep paying till March 2011 and avail tax benefit for the Fiscal Year 2010-11
Hello, I found your blog in a new directory of blogs. I dont know how your blog came up, must have been a typo, Your blog looks good. Have a nice day.
Hi Shabbir
I have invested in ELSS Funds heavily in order to save taxes. I still have pending SIPS.Do you think I should stop investing in these funds immediately as I will not get the benefit any more.
Please advise.
Regards
Girish
Girish, the New DTC is effective from next fiscal and not this one and so I think you should use them for this year.
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