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Save on taxes and get rewards too
February, 05th 2007

Tax-saving mutual fund schemes appear to be in a hurry to reward unitholders with as many as six of them declaring dividends in January 2007. In general, fund houses are known to pay out dividends in the last quarter of the financial year.

Equity-linked savings schemes (ELSS) usually see increased inflows in the last few months of a financial year as investors flock to avail of the tax benefit.

Dividends from equity MFs (diversified, balance and tax saver) are fully exempt from income tax under Section 10 (33). But according to the 2006 amendment in Income Tax Act Sec 80C, investments in ELSS are allowed as deduction from the total income, up to maximum Rs 1,00, 000 in a financial year.

ELSS from DBS Chola, Birla Sun Life, UTI, Principal, HDFC and Franklin Templeton have paid dividends in the last month. Funds like Franklin India Taxshield have delivered dividends as high as 80%, which means that at current NAV, their payout ratio was 21%. Next on the list of big dividend payers is Birla Tax relief 96, has declared a dividend of 260%.

A quick comparative study undertaken by ET reveals that no tax-saver fund had declared any dividend in January 2006. However, the following two months i.e February and March 2006, saw 13 tax-saver mutual fund schemes deliver dividends. Though fund managers choose to get cryptic and philosophical on dividends and their impact on the corpus of funds, it is common knowledge that tax-planning schemes declare huge dividends in the months leading up to March. But in general, fund houses start paying dividends as the quarter progresses.

There is no contravention of law. Funds follow Sebis diktat of closing dividend record within five days of announcement in letter. But whether they conform to the regulation in spirit is open to debate. Industry watchers say that mutual fund distributors hard-sell tax-saver schemes, saying that a good part of the money will be returned to investors in the form of dividends.

And this arrangement benefits all parties involved the taxpayer can get an exemption for the full amount invested though he gets back a considerable sum; distributors get their commissions upfront and the schemes corpus gets a boost.

Say for instance, a person in the highest tax bracket 30% invests Rs 1,00,000 (the maximum exemption under section 80c of IT Act) in Franklin Taxshield in December 2006. On this investment he stands to save tax up to Rs 30,000. As of date, he would have got back Rs 20, 000 as dividend, approximately. That makes his effective investment Rs 80,000.

Thus, the investor avails an effective tax rebate of 37.5%. Given that two more months are left during which the dividend activity will peak, the effective tax rebate can shoot up considerably.

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