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Mutual fund & their tax benefits

There are often questions in the mind of investors whether a mutual fund that they have chosen for the purpose of investment will get the benefit of Section 80C deduction.

June 03, 2013 / 09:35 AM IST

There are often questions in the mind of investors whether a mutual fund that they have chosen for the purpose of investment will get the benefit of Section 80C deduction. This is a legitimate question because often the investment is made with the intention of getting a tax benefit but if the fund that they have invested into does not fall into the specified category then the benefit will not be available. This requires some work on their part and hence undertaking this is beneficial as it reduce any complications at a later stage.

Do the homework before the investment
One of the first steps that have to be taken relates to the time period when this kind of research needs to be done. This has to be undertaken before the investment is actually made and it is in the planning stages so that if some problems are discovered then the entire investment itself is avoided. If the work is done after the investment is made then it could be difficult to reverse the situation without suffering some financial consequences. There might even be some losses and the overall tax planning could suffer so the period when this is done becomes important.

Category important
There is an easy way in which an individual can understand whether a mutual fund investment would be covered under the tax deduction clause. This is by checking the type of mutual fund that the investment is made in as there are clear distinctions made between the different types of schemes so it is not very hard to identify the funds that actually get the required benefit. One of the points is that the benefit is available to Equity Linked Savings Scheme (ELSS) and these are equity funds that have permission for the tax benefit. In addition there are simple equity oriented funds like equity diversified funds that do not have the tax benefit. The ELSS funds are directly and clearly identified so by looking at the category it might be possible to have an idea of the overall situation. In addition for first time investors in equity the funds that are covered under the Rajiv Gandhi Equity Savings Scheme there is also a onetime tax deduction available.

Check out the performance of Equity Linked Savings Scheme

Check the details
It is very easy to be misled by the position wherein some intermediary might just orally tell the investor that the scheme has a tax benefit. One should not just believe the details if these have been heard. The investor needs to check the details out themselves. There are two ways in which one can actually do this. The first one is to be actually look at the name of the fund which often gives the details of the tax benefit in the form of a name that bears words like Tax saver, tax shield, tax fund etc. After this one also needs to check the details of the category and here there would be  the confirmation  in the form of the classification as to whether this is an ELSS fund or RGESS fund. The funds offer documents also mention the tax benefit so this is another place where the same details can be confirmed.

Pension plans
There are also a couple of pension plans available in the market from mutual funds that  have  the same benefit under Section 80C so it is important to look for the details to see whether an investor is looking  at these funds for investment. These are a separate category but the benefit is also available here. The goal of this investment is to generate a pension or regular payment at the end of their working life so this is a long term investment. The nature of the investment is such that there is a mixture of debt and equity in the portfolio so this is not actually a pure equity fund.

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