Friday, April 9, 2010

Tax Saving Mutual Funds

Mutual Funds are considered to be the best investment option with moderate risk. Though, Mutual Funds are linked with market, but they are managed by professional fund managers and fund-houses. You also get the option to invest your money in balanced or pure-equity funds. You can get really good returns from MFs, if you invest for a minimum period of 3-5 years.

As Mutual funds are so popular, special funds were introduced for the investors to save income tax. These funds are called as tax-saving mutual funds and popularly known as ELSS (Equity Linked Savings Scheme). ELSS has a lock-in period of three years, so when you invest in these funds, your money will be locked for three years. But, you can expect better returns after 3-5 years than other traditional savings schemes and you also get the tax rebate under section 80C.

But financial year of 2010 – 2011 may be the last year for you to invest in tax-saving mutual funds in India. As per the upcoming tax-code for the financial year of 2011-2012, Pranab Mukherjee, Finance Minister of India has proposed a new tax code for the financial year 2011. As per the new tax code, there will be no income tax benefits under section 80C for ELSS, Tax-Saving Fixed Deposits, and NSCs.

If the current proposal gets passed in the assembly next year, you will not be able to avail tax-benefits for ELSS from the financial year of 2011 onwards. So, it may be the last year for you to put some decent amount of money in tax-saving mutual funds. The decision of abolishing ELSS from 80C can definitely harm mutual fund industry as a major part of investment goes in tax-saving funds. Best feature of ELSS is its three years lock-in period, so you can easily withdraw your complete amount after three years of time and avail tax-benefits. Only alternative that will be left after new tax-code implementation would be ULIP with moderate risk and to grow your money. Though, as per recent announcement from SEBI, no new ULIP plans will be offered to users. Well, nothing much can be commented as of now as things are not transparent, but it might be a step towards direct tax code implementation and they might be planning to abolish even ULIP from 80C indirectly.

So, if you want liquidity of money along with tax-saving, tax-saving mutual funds can be the best bet for the financial year of 2010-2011.

As an update, direct tax code has been delayed by one year, i.e. 2012. So now you can invest in Tax Saving Mutual Funds (ELSS) in 2011 also and avail tax benefits under sec 80C. Click on the link to find the updates of new tax code for 2012.