Sunset clause - No more Equity-linked Saving Schemes under 80c

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Sunset clause - No more Equity-linked Saving Schemes under 80c

Posted On : Sep-14-2010 | seen (195) times | Article Word Count : 626 |

The taxpayers’ affair with tax saving funds, better known as Equity Linked Saving Schemes (ELSS) has come to an abrupt end after a brief stint. The new Direct Tax Code (DTC), which has now been presented to the standing committee of the Parliament, has trimmed the number of instruments under which the taxpayers took refuge to avoid tax.

Under the DTC, 80c benefits will be limited only to term insurance, Provident Fund (PF), Public Provident Fund (PPF) and the New Pension System (NPS) once DTC is implemented. Other instruments like Unit Linked Insurance Plans (ULIPs) and Tax saving funds will no longer enjoy the benefits accruing under the section 80c for tax deduction purpose.

This could possibly turn out to be a big blow to the tax saving category of funds and to investors who usually get their first brush with equities through these funds.

Over the years, ELSS has caught the fancy of the Indian investor, which is quite evident from the growth in the funds. At the end of July 2010, there were close to 50 such schemes aggregating Rs 25,257 crore contributing around 5% of the total assets under management. The appreciation associated with equities coupled with the tax advantage worked very well for both fund houses and investors, but that will not be the case going ahead.

Where does one get the mix of equity and tax benefit now?

The only option that will give an investor a taste of equity coupled with the benefit of tax break now is via the NPS. However, this route also offers some quantum of solace as the maximum exposure one can take, or is allowed, is not more than 50%.

For those who are not familiar with what NPS is, here is a bird’s eye view of the scheme - Any individual between the age of 18 and 60 years can invest in NPS and get pension benefits. The seven asset managing companies will offer three options — scheme A invest mainly in government bonds, scheme B invest mainly in corporate bonds and partly in equity and government bonds, scheme C invest up to 50% in equity and partly in government and corporate bonds.

The biggest attraction of the scheme is the low fund management fee it charges — 0.009% and a fixed annual account maintenance fee of Rs 350 and an additional Rs 20 per transaction. The catch is you don’t get your money back until you reach your retirement age. So essentially it is a retirement solution.

Taxing times ahead for mutual funds

DTC also advocates a 5% tax on the dividend paid by equity-linked mutual fund schemes and ULIPs, which partly invests in the equity market. At present, there is no dividend distribution tax applicable to equity fund schemes or insurers on income distribution to unit or policy holders. This norm is only applicable to mutual fund schemes and insurance policies that invest over 65% of the total proceeds in equity shares, or equity-oriented mutual funds.

So how do you eat your cake and save it too – go for SWPs

Basically the dividend provision will hurt mutual funds as ULIPs don’t give dividends. Hence, the best option is to go for Systematic Withdrawal Plans (SWPs) as the income you get through SWPs is by way of redemptions, and not dividend and hence no Dividend Distribution Tax. Although both dividends and systematic withdrawals actually mean partial liquidation of the fund capital for tax purposes they are treated differently. However, one thing that needs to be kept in mind is that one must avoid short-term capital gains tax by not redeeming anything within one year of investing.

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<h1>Sunset clause - No more Equity-linked Saving Schemes under 80c</h1> Author: <a href='http://www.articleseen.com/profile_Anjali Shukla.aspx'>Anjali Shukla</a> The taxpayers’ affair with tax saving funds, better known as Equity Linked Saving Schemes (ELSS) has come to an abrupt end after a brief stint. The new Direct Tax Code (DTC), which has now been presented to the standing committee of the Parliament, has trimmed the number of instruments under which the taxpayers took refuge to avoid tax.

Under the DTC, 80c benefits will be limited only to term insurance, Provident Fund (PF), Public Provident Fund (PPF) and the New Pension System (NPS) once DTC is implemented. Other instruments like Unit Linked Insurance Plans (ULIPs) and Tax saving funds will no longer enjoy the benefits accruing under the section 80c for tax deduction purpose.

This could possibly turn out to be a big blow to the tax saving category of funds and to investors who usually get their first brush with equities through these funds.

Over the years, ELSS has caught the fancy of the Indian investor, which is quite evident from the growth in the funds. At the end of July 2010, there were close to 50 such schemes aggregating Rs 25,257 crore contributing around 5% of the total assets under management. The appreciation associated with equities coupled with the tax advantage worked very well for both fund houses and investors, but that will not be the case going ahead.

Where does one get the mix of equity and tax benefit now?

The only option that will give an investor a taste of equity coupled with the benefit of tax break now is via the NPS. However, this route also offers some quantum of solace as the maximum exposure one can take, or is allowed, is not more than 50%.

For those who are not familiar with what NPS is, here is a bird’s eye view of the scheme - Any individual between the age of 18 and 60 years can invest in NPS and get pension benefits. The seven asset managing companies will offer three  options — scheme A invest mainly in government bonds, scheme B invest mainly in corporate bonds and partly in equity and government bonds, scheme C invest up to 50% in equity and partly in government and corporate bonds.

The biggest attraction of the scheme is the low fund management fee it charges — 0.009% and a fixed annual account maintenance fee of Rs 350 and an additional Rs 20 per transaction. The catch is you don’t get your money back until you reach your retirement age. So essentially it is a retirement solution.

Taxing times ahead for mutual funds

DTC also advocates a 5% tax on the dividend paid by equity-linked mutual fund schemes and ULIPs, which partly invests in the equity market. At present, there is no dividend distribution tax applicable to equity fund schemes or insurers on income distribution to unit or policy holders. This norm is only applicable to mutual fund schemes and insurance policies that invest over 65% of the total proceeds in equity shares, or equity-oriented mutual funds.

So how do you eat your cake and save it too – go for SWPs

Basically the dividend provision will hurt mutual funds as ULIPs don’t give dividends. Hence, the best option is to go for Systematic Withdrawal Plans (SWPs) as the income you get through SWPs is by way of redemptions, and not dividend and hence no Dividend Distribution Tax. Although both dividends and systematic withdrawals actually mean partial liquidation of the fund capital for tax purposes they are treated differently. However, one thing that needs to be kept in mind is that one must avoid short-term capital gains tax by not redeeming anything within one year of investing. About the Author: The author is Business Editor. Visit at <a rel="nofollow" href="http://www.religareonline.com/Featuredstorydetails.aspx?newsid=72&title=Sunset%20clause%20-%20No%20more%20Equity-linked%20Saving%20Schemes%20under%2080c"> www.religareonline.com </a> to read more such stories. Article Source: <a href='http://www.articleseen.com/Article_Sunset-clause-No-more-Equity-linked-Saving-Schemes-under-80c_32928.aspx'> http://www.articleseen.com/Article_Sunset clause - No more Equity-linked Saving Schemes under 80c_32928.aspx</a>

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The author is Business Editor. Visit at www.religareonline.com to read more such stories.

Keywords : Direct Tax Code, DTC, Equity Linked Saving Schemes, ELSS, Provident Fund, PF, Public Provident Fund, PPF, New Pension System, N,

Category : Finance : Finance

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