Options For Tax Saving in Mutual Funds

It’s month of February and  many will be heading towards searching for the last opportunity to identify any investment which can save you tax for this financial year. For salaried the high tax deduction would have happened by now but you still wish to get the refund when filing your returns in July 2015. Mutual funds have some schemes where tax benefit is available and they are helpful when you are making a last minute  lumpsum investment. But before you ponder into any tax saving instrument, especially at the year end, it’s beneficial to understand these avenues as most of them are equity oriented schemes and your investment should match your risk tolerance.

Here is what is available in mutual fund for tax planning and what you should consider:

1. ELSS

Equity Linked Savings Scheme has been for a long time now.  With a three year locking this scheme is well suited for deriving gains from equity markets. However the underline investment is in stock market and so it has its inherent risk which every investor has to consider. Within ELSS category schemes invest in different segments of markets which actually bring variation in the volatility. For example Franklin India Tax shield has almost 70% in large cap stocks while Reliance tax saver takes almost 60% exposure in mid and small cap stocks. This variation will produce the different level of  volatility and variation in returns. This differentiation is also a decisive factor in resulting of performance consistency.So when you are investing an ELSS scheme you have to understand the nature of investment to gauge the volatility risk in the scheme. The  return will vary accordingly.

You can claim exemption Under Sec 80C by investing in ELSS schemes. This benefit limit has been enhanced to R 1.5 lakh in budget 2014. Even at year end by investing as  a lumpsum in these schemes you are eligible for the exemption. But whenever you are taking the decision ensure you go deep in analyzing the scheme.

2. RGESS

Known as Rajiv Gandhi Equity Savings Scheme this was launched in 2012 with an aim to get more retail investors in the equity market. By investing up to R 50000 you can claim deduction upto R 25000 from your income. The scheme has gone changes in budget 2013 wherein you are allowed to stagger the investment in three assessment years instead of only first year. The scheme has stipulated certain conditions like Income below R 12 lakh, Lock-in of three years and many others which needs to be fulfilled to claim the deduction. Also the scheme rest conditions on selling the investment else deduction get reversed.  Initially it was aimed at direct equity investments but post launched most mutual funds houses have come out with RGESS schemes. The benefit you avail is under Sec 80CCG which is over and above 80C benefit.

RGESS scheme is targeted mainly at new investors i.e. someone who have not exposed himself/herself to equity markets. The scheme has its concern on the manner it is structured especially allowing selling equity investments very early. If you have not invested in equity markets before then exposure only for tax saving may not be a wiser approach. Before you make a decision its good to understand about risk tolerance and benefit of long term investing. The benefit in tax saving through this route may not be good enough for the risk.

3. Pension Plans

For long mutual fund industry have seen only two pension plans – Franklin and UTI. These pension plans also provide tax benefit under section 80C. Although they haven’t got much of attraction they needed primarily because they are more perceived as a long term investments, pension plans from mutual funds will be in news in 2015. Recently Reliance Mutual Fund closed its offer for Retirement fund and there are more to come. Tax benefit is surely an important consideration but more than that it’s the planning for your retirement. These plans may see a higher interest considering the absence of avenues for retirement planning esoecially in insurance. But the choice of these plans cannot be based only on the tax benefit you avail. A detailed analysis of your retirement needs  have to be analyzed and then see whether these products fulfill them.  If you are well aware and can create an investment portfolio then you may would like to do so through diversified equity funds. But if you need a discipline with a mix of equity and debt then this may be  one of the choice. Whatever is the requirement the tax benefit is  a consideration in these plans but only after analyzing your exact requirement and the suitability of these products in your investment portfolio.

 Tax saving is an important element in your financial planning. You need to get it right to avoid any disappointment. If you miss it and end up investing at year end mutual funds do give you choice. Avoid investing without knowing about the product and ensure you are ready to hold your investment longer if market conditions are not in favor for redeeming your money.

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