With the way the market has been booming, fixed-return options available under Section 80C of the Income Tax Act have lost their sheen. On the other hand, Equity Linked Savings Schemes (ELSS), with an average return of 52.03 per cent per annum over the last five years, have been garnering a lot attention.
Did you know that you can save taxes on the Rs 1 lakh limit (the limit under Section 80C) yet invest much less than that? Sounds impossible, doesn't it?
According to the rules laid down by the regulatory body Securities and Exchange Board of India (SEBI), the date of dividend declaration for mutual funds can be made public five days before the record date. But why would one invest in an equity mutual fund (dividend payout option), just before it declares dividend? After all it appears that when an investor does so, all he does effectively is liquidate his investment.
But the equation is bit different in the case of an ELSS. These are diversified equity mutual funds which offer the tax benefit under Section 80C. Let's illustrate. Suppose an ELSS fund announces that it would declare a dividend of Rs X per unit after five days. Now if you are aware of this news, you can simply pump in Rs 1 lakh in the fund before the record date and opt for the dividend payout option. Of course, we made that statement on the assumption that the fund is worth investing in. Now, when the dividend is declared, you would get back a portion of the amount you invested as dividend (at the rate of Rs X per unit). This way you end up saving taxes on the fully invested amount of Rs 1 lakh but effectively pay much less.
An actual example should make things clearer. Franklin India Taxshield, a three-star rated ELSS, declared a dividend of Rs 8 per unit on November 14, 2007 (record date). Let's say someone invested Rs 1 lakh in this scheme soon after the announcement. Let's further assume that the amount was invested on November 13, 2007. The table illustrates how he would have saved taxes on Rs 1 lakh but would have by effectively invested just Rs 82,730. That's translates into a savings of Rs 17,269. Quite a difference! And for those of you who actually borrow money to meet your Section 80C rquirements, this will work out even better.
In case you were unaware, the dividend received is tax free.
So if you have not yet completed your Section 80C requirements, keep a watch for dividend declaration of ELSS funds in the coming months. To figure that out, you can refer to the Fund Action section on this website.
| Dividend Record Date | 14-Nov-07 | |
| Dividend Rate | Rs 8/unit | |
| NAV (as on Nov 13, 07) | 46.3 | |
| Amount Invested | Rs 1 lakh | |
| Units | 2158.7 | |
| Amount of Dividend Received | Rs 17,269.3 | |
| Net Investment | Rs 82,730.7 |
(by valueresearch)
