Paying taxes are always not the favorite among every
individual as we realize that we need to part away with a
good chunk of money. The returns of different tax saving
instrument was again not so attractive for the investors.
But now there are mutual funds. Mutual Funds by their very
nature are not tax saving instruments but investment
products that may offer tax concessions. But the emergence
of ELSS mutual fund has changed the course altogether.
Equity Linked Savings Schemes (ELSS) are made with the
purpose of saving tax through it in such way that you are
not just saving but also investing that also in equities
though a mutual fund. ELSS schemes give twice the benefit as
compared with diversified equity schemes. They give you tax
sops on investments and are also exempt from long term
capital gains tax.
These tax saving are special equity funds, which have to
invest at least 80% of their corpus in equity. The
investments are locked in for a period of 3 years.
People in general have understood that ELSS is the best way
of an investment option that provides you a very simple way
of investing in equity market and save taxes while doing so.
The biggest mistake investors make is that they view their
tax-planning avenues in isolation and think about it just
once a year. When you decide how much of your money you need
to allocate to fixed return and equity and how you should
distribute your risk, tax saving instruments must be taken
into account. The route of SIP can also be undertaken by the
investor. Through SIP in ELSS schemes the investors not only
save and invest but also save tax regularly. If the investor
continue doing this for a longer period of time then it is
sure that the corpus of fund that can be created will be
huge.
Apart from ELSS schemes, diversified equity schemes are a
good investment considering that capital gains in equity
funds below one year are taxed at a rate of 10% and over a
year are tax-free. This option can be best exercised using a
Growth Plan offered by mutual funds. The primary objective
of a Growth Plan is to provide investors long-term growth of
capital.
Dividend paid in Dividend Plans is tax free, and no
distribution tax is deducted. To reduce the affect of STT
you need to select the dividend option, since it remains
tax-free. If you take out the profit in the form of dividend
then you do not need to pay STT. For the risk averse, there
are ways to reduce the tax burden on returns.
In the dividend option, dividend is tax free in your hands.
But the dividend distribution tax deducted at source also
comes out of your NAV. So you end up paying a tax of 10%.
Further any increase in NAV over and above the dividend
distributed, is taxed as in the case of the growth option.
