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New Tax Code, MFs and Investors

Learn how the new rules will affect fund investors

Please tell me if there is anything beneficial for mutual fund investors under the New Tax Code.

Under the New Tax Code, it looks like mutual funds will have a harder time. First thing is that the equity-linked savings scheme (ELSS), which was tax free under 80(C) in a lock-in form, has not been mentioned at all. Then the second-most important thing is that that long-term capital gains and short-term capital gains will be changed completely, with all gains to be added to income and then you will be taxed accordingly. Under the earlier system one could invest in an equity scheme under the growth option for a year and then start withdrawing, which would make all the gains tax free.

Till now all dividends were tax free. But now that will not be the case. This will affect the investing habit of many. Till now many people used to churn frequently. Under the new dispensation, during the investment and growth period, you need not worry about taxes. But, once you withdraw, an investor will get taxed. This will have the effect of making the investor remain invested for a longer time, which is a desirable thing, but as per the taxation rules all the profiles and methodology of investors will change.

As gains will be taxed, the new generation of investors will not choose this option.

No, that may not happen. Rather, it will have a beneficial effect on the new generation because in the last 8-10 years, taxation rules have always given more incentives for short term investments.

Investors should look at it carefully. If you have made an investment a long time ago and considerable gains have accrued, then you must realize those gains before April 1, 2011 because till then whatever your returns are, they will be completely tax free.

It changes the dynamics of the market for investment. The New Tax Code also has the potential to reduce litigation and hence save time as well as simplify things. One thing that stands out very sharply is that the Code is extremely human to the individual investor.

It is not just about increasing the tax-saving-instrument limit from Rs one lakh to three lakh, but that a child’s education will be sheltered to a specific limit. Effectively 80 (C) of Rs 1 lakh encompasses everything, whether investment, or child’s tuition fees or anything else. This is not the case any more. And tax rates have been moderated too.

Also, there are enough incentives for people to bring their financial standings in the official framework. Supposedly, if one earns Rs 12 lakh and saves Rs 3 lakh you will just not have to bother about the Rs 9 lakh, but pay Rs 90 thousand in taxes. So the moderation of tax rates is very empowering and positive.

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