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the face of it post-budget 2002-03, it would seem that Mutual Fund investments are no
longer as attractive as before. The tax on dividends and cut in the Section 88 limits are
seen as taking some of the sheen off investments in Mutual Funds. However, while the
budget proposals will change the investment landscape for Mutual Fund investors, they
could remain attractive investment option because of the following points: Dividends from Mutual Funds will now be taxed in the hands of the
investor. Before the new proposals, dividend from debt funds was subject to a 10 per cent
dividend distribution tax plus surcharge. Dividends received from open-ended equity funds
were completely tax-free. Now, equity funds and schemes of UTI will attract a 10 per cent
dividend tax. However, capital gains tax will be levied as earlier. If units are redeemed
within a year, short-term capital gains tax will be applicable. If units are redeemed
after a year, either a 10 per cent long-term capital gains tax without indexation benefit
or 20 per cent tax after indexation benefit will be applicable. This could be more
beneficial that the dividend tax.
Investors can now look at a longer investment horizon. You
can invest in a Growth Plan of a Mutual Fund and stay invested for more than a year. If
you realise your gains after a one-year holding period, you will be eligible for
indexation benefit and will attract a long-term capital gains tax at the rate of 20 per
cent. You can also move to Systematic investment plans of Mutual Funds.
Tax saving avenues have also narrowed. The tax rebate on
investments under Section 88 will now be available at the rate of 20 per cent only for
individuals with taxable income below Rs 1.5 lakh. For taxable income between Rs 1.5 lakh
and Rs 5 lakh, the rebate will be at the rate of 10 per cent. For those with taxable
income over Rs 5 lakh, no rebate will be available. As such, investors could now look at
investment in other avenues like equities through mutual funds. Especially, if you do not
have the benefit of Section 88.
In addition to this, there will be a maximum cap of Rs 2
lakhs on RBI Relief Bonds with a reduced interest rate on the same of 8 per cent. Interest
rates on PPF have been reduced by 0.5 per cent. By next financial year these rates will be
benchmarked to the G-Sec yield on corresponding maturity. This will translate into a huge
fall in the returns from these instruments. The result could be large investible surpluses
in the hands of such individuals. As such, these funds could get channeled into other
avenues like equities through Mutual Funds.
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