There is still a year to go before DTC (Direct Tax Code) kicks in, and there seems to be some amount of confusion in people’s minds on how DTC will affect the tax saving ELSS mutual funds.
To understand the effect of DTC you need to first know how ELSS mutual funds give you tax benefit. These mutual funds are covered by Section 80C, which mean that the money you invest in these funds is reduced from your taxable income (up to a limit of Rs. 1 lac) and hence you pay less taxes. With that said – let’s take a look at how DTC impact on your existing as well as new ELSS purchases.
Effect of DTC on your existing ELSS MFs
The funds that you’ve already bought have given you the tax benefit in the year you bought them, and after the year of purchase there is no tax benefit from them.
Given that, you shouldn’t be worried about the ELSS funds you have already bought.
The only thing I’ll add to that is some people choose for the dividend re-investment option, and the re-investment is treated as a fresh investment. This is important because ELSS funds have a lock in period of 3 years, and your new units are locked for a further 3 years. With that in mind, change your dividend reinvestment option to a simple dividend or growth option.
ELSS Purchases from now till April 2012
Since DTC will kick in from the next financial year, you can still buy them this year and get tax benefit under 80C this year.
ELSS Purchases After DTC Kicks In
Under DTC – ELSS mutual funds will no longer enjoy the tax benefits that they currently do. I don’t know whether they will still have the 3 year lock in period, but it doesn’t make any sense to have the lock in period if they’re not going to have any tax benefit.
Will DTC affect the performance of the existing funds?
There was an interesting comment where a reader asked that since the popularity of ELSS funds is bound to go down, the assets under management are likely to come down, and will that have any effect on the performance of these funds?
I can’t think of any reason why it will play out like that. If anything, it should be easier for a fund manager to produce better returns because the base is lower.
These were some thoughts that came to my mind while answering ELSS related questions here, please feel free to leave a comment if you have any questions or observations on these.