What are the income tax implications when the tax saving fund is encashed after the required limit of three years of being invested?
Tax-saving funds save you taxes (under Section 88) the year you invest in them. After that, they are exactly like any other equity fund investment as far as taxation is concerned. This applies both to redemption and dividends. Of course, you will only have long-term capital gains since the lock-in period means that you will not be selling the funds early enough to realise any short-term gains.
The applicable rate is 10 per cent or 20 per cent with indexation benefits, whichever of the two is lower. Any dividends received from equity funds during financial year 2003-04 are fully tax-free. Neither the mutual fund nor the investor has to pay any tax on these.