The Finance Bill 2015 largely consolidates the incremental measures taken over the last nine months by the Narendra Modi government to improve ease of doing business, control the black money menace, promote better use of the Direct Benefit Transfer mechanism, kick-start the investment cycle through government spending and control fiscal deficit.
Among the budget proposals, the few changes pertaining to mutual funds have only minimal adverse impact on investments in the dividend option of non-equity oriented schemes. Surcharge on income tax has been increased by 2%, including that on Dividend Distribution Tax (DDT) on dividends by non-equity oriented schemes.
A positive change is that tax neutrality will be maintained on consolidation of mutual fund schemes, that is, merged schemes will not be treated as sale and, thus, have no consequent capital gain or loss.
Post budget, mutual funds still remain the best bet for sustainable wealth creation because of their sheer tax efficiency, in addition to superior returns, liquidity, flexibility, ease of operation and strong regulatory oversight. To get the best out of your mutual fund investments, the following points should be built into your investment strategy:
Investors in 10% or 20% tax bracket should opt for `growth' option in all non-equity oriented schemes, for investments meant to be held for less than three years. All investments (irrespective of the investor's tax bracket) meant to be held for over three years should be in growth option to take advantage of inflation index for determining `cost of acquisition' under long-term capital gains calculation
Investments with three months' to under three years' horizon should be in arbitrage funds. Also, if horizon is under one year, opt for the dividend option only, as no DDT is applicable on arbitrage funds and short-term capital gains (investments held for less than one year) are charged to tax at 15%. Gains on investment in such funds (held for over one year) are tax-free
Plan your retirement with the more tax-efficient, flexible and higher return-yielding mutual funds, (equity, debt, or a combination of the two). In pension plans of insurance companies, service tax is paid twice (once at the time of payment of contributions and then at the time of using the accumulated corpus to buy an annuity on the vesting date). In the National Pension Scheme (NPS) too, one needs to buy such annuities on withdrawal superannuation. The accrual debt funds deliver much better returns than such annuities. Also, no service tax is to be paid on the amount invested in mutual funds. Additionally, the pension (from any source) is included in taxable income and is wholly exposed to the investor's marginal rate of taxation, unlike the Systematic Withdrawal Plan (SWP) of mutual funds wherein an efficient structuring results in almost nil tax.
SWP is a facility under which every month, on a prespecified date, a fixed prespecified amount is withdrawn from the designated mutual fund scheme and credited to the investor's account. This withdrawal is by redeeming units equivalent to the redemption amount (at the NAV on the redemption date). However, for tax purposes, the capital gains is not equal to the withdrawal amount, rather it is only the increase in the NAV in respect of the units withdrawn. Also, if such units are held for over three years, applicability of inflation index for determining cost of acquisition reduces the taxable long term capital gains to almost nil. This creates enormous tax efficiency .
No pension scheme in India can match the returns and tax efficiency of a mutual fund scheme (or a basket of the same) treated by an investor as his / her pension fund along with SWP as a mode of receiving pension.
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds
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