Small efforts at regular intervals make a huge change that is desired. A common man saves from his entire earnings every day, every week, every month so that after retirement he will be able to live at least a comfortable life. There are various investment instruments in which he can venture his money to multiply his savings. It may not be certain that the instrument in which he invests is going to earn him positive return, but one thing that is very certain is that he would be liable to pay tax on the return that he earns. But the Government of India is not so cold-hearted. It has provided exemptions under Section 80C. It solely depends upon the individual how much he can avail those exemptions.
In this article, H&R Block will try to give a glimpse of how the Tax Savings Mutual Funds helps you to enjoy those exemptions.
A mutual fund is an investment vehicle made up of a pool of money collected from many investors to invest in securities such as stocks, bonds, money market instruments and other assets. Investing in equity-based tax saving mutual funds – ELSS gives an exemption of maximum up to Rs 1,50,000 under Section 80C of the Income Tax Act.
A pool of funds collected from different investors, which is further diversified into various sectors. These investments are made for a minimum of three years.
For example, Mr Onkar wants to invest Rs 10,00,000 in the tax saving mutual funds. Let us assume that his entire funds are proportionately invested in the equity market only into different sectors and industries as follows:
Automotive industry: 19%
Consumer durables: 8.7%
Consumer non-durables: 10%
The Minimum Lock-in period for a mutual fund is 3 years.
Therefore, the following table shows the performance of the portfolio at the end of three years.
|Sector||Percentage of funds invested||Amount
|Number of shares||Initial Price of one share (Rs)||Final price of one share after 3 years (Rs)||Profit/Loss incurred (Rs)||Total Profit/Loss (Rs)|
|Consumer durables||8.7 %||87000||2750||87||97||22||60500|
|Consumer non-durables||10 %||1,00,000||3000||100||118||25||75000|
For an investment of Rs 10,00,000, the returns received will be Rs 5,22,425 which gives a compound annual growth rate of 15.04%. Out of the total amount, Rs. 1,00,000 will be exempted as per the Union Budget 2018 and the remaining Rs 4,22,425 will be the taxable income. Therefore, total LTCG Tax payable would be only Rs 42,243/- (10% of Rs 4,22,425/-).
Detailed features on tax saving mutual funds:
Lock in Period
The lock-in period for the various schemes of tax saving investment fund is minimum of 3 years. It is an investment over a long period which has a probability to earn higher returns. Premature or before completing 3 years investment cannot be redeemed or switched to another scheme.
Funds which are pooled together are managed by a fund manager who has desired expertise to invest in Equity market or equity securities. As lock-in period is more, the risk of redemption is reduced including lower transaction cost additionally chucks in the portfolio is also reduced.
As per the Union Budget 2018, the returns above Rs 1,00,000 are taxed at flat 10%. More than the Rs 1,00,000 exempted, you can claim a deduction of Rs 1,50,000 under section 80(C). Also, the dividend earned on the equity-based mutual funds will be taxed at 10%.
Systematic investment plan (SIP) helps to invest the amount in diversified sectors to achieve maximum returns. There is no burden of the lump sum amount to pay in one go. Every category of an individual can invest in tax saving mutual funds.
Tax saving mutual funds are based on the investment made on equity and equity-related securities in the capital market. The equity market is the market which provides high liquidity. Therefore, in case of emergency, you can sell some of your units to avoid a financial crisis.
Open-Ended and Close-Ended Funds
The investment can be categorised into open-ended funds or close-ended funds. In the open-ended fund, you can withdraw the amount invested at any point of time during the period of investment whereas in the close-ended fund you can withdraw the amount only after completion of the period of investment.
Equity Markets provide higher returns in a shorter amount of time than other instruments. The following table provides that detailed comparison between the equity instruments and other instruments.
Convenient Investment Payment
Option to select the method of payment may be lump sum or SIP as per investors choice. Investors must invest minimum with 500 and no maximum limit. The flexibility of choice is available.
Traditional method of Paperwork was difficult with a probability of mistake. The process of opening account is completely online using Aadhar card. The easy availability of online transactions reached new heights in significantly period.
Funds are mainly focused on investing in equities and various equity-based investments. As investment is made in equity risk component is high, but a number of diversification concerning the market helps to minimise the risk.
Managed by Experts
The expert who has extensive knowledge of the capital market helps identify and select the best from investment options. Investors can get the help of an experienced person who can grow their investment in future.
Flexible Redemption, Switching or Reinvestment
Investors can optionally redeem their mutual fund investments, switch to a different scheme or continue to stay invested in the fund after the three-year lock-in period ends.
There is complete transparency of funds where the amount is invested, how many units are held, portfolio information, NAV, valuations, expense ratios, all such data is freely available to investors as well as market analysts and another stakeholder.
You can receive a maximum exemption of up to Rs 1,50,000 under section 80C if you invest in the equity-based mutual funds. Also, as you invest in ELSS for the long term, you have an additional exemption of up to Rs 1,00,000 in respect of long-term capital gain from such units. So, in total, you can receive a tax exemption of Rs 2,50,000 if you invest in long-term mutual funds.
The lock-in period of a mutual fund is of only 3 years, whereas other instruments have a lock-in period of at least 6 to 15 years.
The risk attached to tax saving mutual fund is moderate compared to risk-free investments like NSC and PPF.
Lock in 3 years has put a restriction on withdrawal which can be considered as a disadvantage.
Limited tax benefit
Investment made has no limit to invest but the tax benefit u/s 80c is restricted up to 1,50,000.
Net Asset Value
It is the value per share of a mutual fund on a specific date or time.
It is calculated by (Assets of a mutual fund – Liabilities of a mutual fund)/ number of outstanding shares
Assets under Management
The total amount of pool of funds of various investors controlled by a company is known as assets under management.
The following table gives the top tax saving mutual funds to look for investment in 2018-19.
|Fund Name||1 month %||3 months %||6 months %||1 year %||2 years %||3 years %||5 years %|
|Principal Tax Savings||-5.2||-2.7||-4.0||11.7||24.3||14.0||20.1|
|Principal Tax Savings – Direct||-5.1||-2.5||-3.7||12.2||24.8||14.5||20.6|
|IDFC Tax Advantage (ELSS)-RP (G)||-4.3||-0.7||1.3||17.8||23.2||12.4||20.5|
|IDFC Tax Adv. (ELSS) -Direct (G)||-4.2||-0.4||1.9||19.3||24.6||13.7||21.8|
|ABSL Tax Relief 96-Direct (G)||-2.6||1.7||1.7||18.6||21.9||14.2||22.5|
|ABSL Tax Plan-Direct (G)||-2.7||1.8||1.6||18.3||21.5||14.0||21.9|
|ABSL Tax Relief 96 (G)||-2.7||1.5||1.2||17.2||20.7||13.2||21.4|
|ABSL Tax Plan (G)||-2.7||1.5||1.1||16.9||20.1||12.7||20.7|
|Tata India Tax Savings Fund – Reg (G)||-3.7||-1.3||-2.3||10.4||19.2||13.4||–|
|Tata India Tax Savings Fund – Direct||-3.6||-1.0||-1.7||11.8||20.5||14.7||–|
|L&T Tax Advantage -Direct (G)||-2.6||-0.2||0.8||12.7||23.7||14.6||19.3|
|HDFC Long Term Advantage (G)||-2.5||-3.0||-3.2||9.4||20.0||12.0||17.0|
|DSP BR Tax Saver Fund – Regular (G)||-3.9||-1.6||-4.5||5.9||18.9||12.3||19.0|
|DSP BR Tax Saver Fund – Direct (G)||-2.9||-1.3||-4.0||7.1||20.2||13.4||19.9|
|Kotak Tax Saver – Regular (G)||-2.3||-1.0||-4.5||3.7||17.7||9.0||15.7|
Note: Returns above 1 year are annualised.
Investing in Tax Saving Mutual Funds, you would be able to get a deduction of Rs 1,50,000 under section 80(C) and also if you invest for long term, you would be receiving higher returns. Therefore an individual should smartly invest in the top mutual funds so that they can save maximum tax on their returns.