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Session 19: Tax Planning with Mutual Funds



We are glad to have you with us for our Nineteenth Session - Tax Planning with Mutual Funds.

So let us now begin with our learning session today.

All of us engage in an economic activity and work hard to make a living. But as we do that, it becomes imperative for us to work a little harder and smarter, to save our taxes the legitimate way, so that it can help us make our dreams come true. While there are a host of provisions under the Income Tax Act, 1961 and numerous investment avenues, in our learning session today, we'll take you through how you could use mutual funds in your tax planning exercise and the aspects you must consider while investing, so as to save tax through this investment instrument the prudent way.

So let's understand the special category of schemes that mutual funds offer, in order to save tax.


Equity Linked Saving Schemes (ELSS)

  • (This is...) A category in mutual funds that offers tax saving benefits to investors (...It is popularly also known as tax saving mutual funds)

  • (They...) Are diversified equity funds (...as they invest a dominant portion of their assets in equities across market capitalisation segments and sectors)

  • (A distinguishing feature about them is that...) ELSS are subject to a compulsory lock-in period of 3 years

  • Most ELSS allow a minimum investment of (...as low as...) Rs 500, while there is no upper limit

  • (Like any other equity mutual fund scheme...) ELSS allow you to invest either in lump sum or through Systematic Investment Plan (SIP) (...which is a mode of investing)

  • Investment in ELSS is possible irrespective of income earned by the individual or whether he's old or new to investing in equity markets

And what's the Tax Benefit...

  • (Investment in ELSS...) Makes an investor eligible for a tax deduction under section 80C of the Income Tax Act, 1961; subject to a maximum limit of Rs 1 lakh per annum

  • (Moreover at the end of the lock-in period and at exit if there is any gain - it is classified as Long Term Capital Gains as per the current tax provisions...) Being an equity scheme, Investors need not pay any Tax on the Long Term Capital Gains in ELSS

Then there are...


RGESS Mutual Funds

  • Rajiv Gandhi Equity Saving Scheme (RGESS) is a tax saving avenue introduced by the Central Government in the Union Budget 2012-13

  • Mutual funds too are eligible to launch mutual fund schemes investing in instruments as enunciated for RGESS (...It is noteworthy that RGESS is targeted towards attracting the new retail investors into equity markets)

  • (Thus...) Only first time equity investors (...who do not have a demat account, or have one but not made any transactions in equities till the date of notification of RGESS i.e. November 23, 2012...) can claim tax benefit under RGESS

  • (Moreover...) RGESS is available to those whose gross annual income is less than or equal to Rs 12 lakh

  • In case of mutual funds, the units of RGESS eligible Exchange Traded Funds (ETFs) and mutual fund schemes (which are traded and listed on the exchange) can be considered for investing in RGESS and to avail a tax benefit

  • (Also... Apart from RGESS mutual fund schemes, the...) Other securities eligible for investing in RGESS and to avail a tax benefit are:

    • Top 100 stocks listed under S&P BSE-100 and CNX-100

    • Stocks of Maharatna, Navaratna and Miniratna Public Sector Undertakings (PSUs) (... including their Follow-on Public Offers (FPOs))

    • IPOs of PSUs with Government stake not less than 51%, with revenue of Rs 4,000 crore in the last three years

      So by investing predominantly in large cap and PSU domain, RGESS attempts to provide a relatively safer avenue in equity investing and ensure liquidity. Moreover, in order to make it convenient to identify the eligible stocks and mutual funds the stock exchanges have to furnish a list of RGESS eligible stocks / ETFs / MF schemes on their website. Also, whenever there is any change in the said list, the revised list will also be forwarded to the depositories at monthly intervals, while mutual fund houses shall communicate the list of RGESS eligible MF schemes / ETFs to the stock exchanges.

  • The maximum investment permissible under RGESS is Rs 50,000

  • The money invested in RGESS mutual funds (...and even the other eligible instruments for RGESS...) is subject to an overall lock-in period of 3 years

  • (It is noteworthy that...) The scheme has a fixed lock-in period of 1 year, on the expiry of which one can sell / pledge / hypothecate one's securities (But...) Withdrawal of money before 3 years is not possible

  • (However...) Investors are allowed to churn their portfolio during the flexible lock-in period (i.e. after the completion of the fixed lock-in period of 1 year )

  • (Further...) In case the investor fails to comply with any condition specified in RGESS, the benefits availed there under are withdrawn and the investor is liable for tax payment

You see, while there are a host of instruments for investing in RGESS and to avail a tax benefit, investing in RGESS eligible ETFs and / or schemes offered by mutual funds, can aid first time retail investors because mutual funds provide the expertise of professional fund management. Otherwise, first time retail investors may find difficulty in identifying the right stocks and the valuations at which they should include them in their portfolio. By routing their money through mutual funds, they can be confident that their money will be used more efficiently in identifying the right stocks at right valuations through a process driven investment strategy.


And what's the Tax Benefit...

  • (The investment amount makes an investor eligible for...) A tax deduction under section 80CCG of the Income Tax Act, 1961 to the tune of 50% of the amount invested for investments of up to Rs 50,000 only

But before you invest your hard earned money in ELSS and / or RGESS in your endeavour to save tax, here are a few important aspects that you should consider...


Things to consider before investing in ELSS and RGESS mutual funds

  • Your Age (...As we have learnt in our earlier learning sessions, your age determines your asset allocation. Usually at a younger age the ability to take risk is high and vice-versa. Thus for prudent tax planning too, if you are young, you should allocate more towards market-linked tax saving instruments such as ELSS and RGESS, and less if you are much older. If you are young, the investment horizon would be fairly long, which in turn would enable you to make more aggressive investments and create wealth over the long-term to meet your financial goals.)

  • (Then comes...) Your Income (...If your income is high, your willingness to take risk is generally high. This thus can facilitate you to skew your portfolio more towards equity related instruments such as ELSS and RGESS, in the endeavour to save tax. But if your income is not high enough, then tax planning the assured return way - by investing in instruments such as Public Provident Fund (PPF), National Savings Certificates (NSCs), 5 Yr Bank Fixed Deposits, etc - would be appropriate.)

  • (Likewise...) Your Expenses & Liabilities (...should also be considered. If one is shouldering more expenses and have obligations to meet, then investing in ELSS and RGESS which offer market-linked returns may not be suitable. But if one has well-controlled expenses and liabilities, which result in higher investible surplus, market-linked tax saving instruments can be explored.)

  • (Also...) Your Financial Goals (...If you have financial goals set in your life such as buying your dream home, a car, planning for your children's education, their marriage, your retirement, etc.; the same too could have an influence on your tax planning and investment in tax saving instruments. So, say for example your goal is to retire from work 5 years from now, then your tax saving investment portfolio should also be less skewed towards market-linked tax saving instruments such as ELSS and RGESS, as you are quite near your goal and your regular income will stop soon.

    But if you are many years away from your financial goal, you should ideally have maximum allocation to market linked tax saving instruments such as ELSS and RGESS, and less towards those tax saving instruments which provide you low assured returns.)

  • (And then comes...) Your Risk Appetite (...It refers to an individual's willingness to take risk on the basis of an assessment of various facets such as age, income, expenses & liabilities and financial goals that we just learnt of. So, say if your risk appetite is categorised as high, you can skew the tax saving portfolio more towards market-linked tax saving investment instruments such as ELSS. But if your risk appetite is relatively low, your tax saving investment portfolio should ideally be skewed towards instruments which offer you assured returns. And if you are a moderate risk taker, you can take a mix of 60:40 into market-linked tax saving instruments and assured returned tax saving instruments respectively.)

    So to summarise what we just learnt: if your age permits i.e. if you are young, income is high, expenses & liabilities are low and therefore willingness to take risk is high along with your financial goals being far away; you may look at ELSS and RGESS to avail a tax benefit under section 80C and 80CCG respectively of the Income Tax Act, 1961.

Now before we end our learning session today, here are some points you need to remember...

Points to Remember...

  • Effective tax planning is possible if options available under mutual fund investing are well-explored and one has invested smartly

  • ELSS funds are subject to a compulsory lock-in period of 3 years

  • Investing in ELSS offers tax benefits under section 80C of the Income Tax Act, subject to a maximum limit of Rs 1 lakh (...However it should be noted that one can always invest more than Rs 1 lakh in ELSS, but the tax benefit would be restricted only to a sum of Rs 1 lakh.)

  • RGESS eligible ETFs and mutual fund schemes (...and the other securities eligible for RGESS...) provide tax benefit to first time retail investors

  • RGESS benefit is available to those whose gross annual income is less than or equal to Rs 10 lakh

  • The maximum Investment permissible under RGESS is Rs 50,000

  • Investment in RGESS mutual funds (...and the other securities eligible for RGESS...) is subject to an overall lock-in period of 3 years and a fixed lock-in period of 1 year

  • Investment in RGESS mutual funds (...and the other securities eligible for RGESS...) offers a tax deduction under 80CCG of the Income Tax Act, 1961 to the tune of 50% of the amount invested

  • (And last but not the least...) While investing in market-linked tax saving instruments it is vital to consider age, income, expenses & liabilities, financial goals, etc.

  • (...and assessing all these) Judge your risk appetite and thereafter invest in ELSS and RGESS mutual funds

So to end our learning exercise today, we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

Just Click On The Link Below.



Thank You For Participating!

Disclaimer: The contents of this document are only for informative purposes and are not to be used or considered to be an offer to sell or buy units of Franklin Templeton Mutual Fund schemes. This video is for information purposes only, provided on an 'as is' basis. Nothing in it should be construed as personal financial advice. You are responsible for your own investment decisions and you should seek advice concerning suitability from your investment adviser regarding any of the investments mentioned. The video is for personal non-commercial use only and may not be copied, stored, redistributed or broadcast in any way. We recommend you read the complete Terms of Use.


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