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Smart investor's smart mix : ELSS + Indexation
Published On , 17 Feb 2019 By TOI
Equity funds with tax sops come with a three-year lock in while investments of over three years in Debt funds enjoy indexation benefits.
Investing for tax advantage is not the ideal strategy to invest but a large number of Indians take this route, especially during the last three months of the financial year when investments to save on taxes become almost an urgent affair. Debt funds also offer a unique tax advantage but not many investors know about it. In Equity mutual funds, Equity linked savings scheme (ELSS) is the most popular of the schemes that come with some tax sop and a three-year lock in. Debt funds, on the other hand, come with a postinvestment tax advantage, provided you remain invested for more than three years.
These are governmentapproved Equity funds that has to invest at least 65% of its corpus in equities or equivalent instruments.
Government has allowed investments of up to Rs 1.5 lakh in ELSS to remain tax free. Since the money is locked-in for three years, the fund manager enjoys greater leeway to select and invest in his/her favourite stocks compared to other open ended Equity funds.
This is a process by which the impact of inflation on the returns generated by Debt funds are reduced before the government taxes the returns. Every year the government publishes inflation-linked indexation numbers and investors use the number to reduce his/her tax burden which could, postindexation, be just about 3-5%. Unknown to many, if you invest in a Debt fund now and withdraw it in April 2022, that is a little over three years, you could even enjoy four indexation benefits.
PERSONAL TAXES AND INVESTMENTS
HOW INDEXATION CAN SAVE SOME TAXES?
Indexation is the government’s way of compensating investors for the impact of inflation that adds up to one’s total return. The government publishes the indexation number every year and investors can use the same to calculate their inflation-adjusted cost of acquisition. Then this is deducted from the final selling price of the Debt fund. The tax is charged on this balance. A smart investor could invest in the closing months of a fiscal year, remain invested for a little over three years and then withdraw the money during the early months of the fourth fiscal since investing. This way he/she could claim four indexation benefits by investing for much less than four years.
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