Mutual fund tracker Value Research has put it in the doghouse with a two-star rating. Yet, the Reliance Quant Plus Fund scheme attracted inflows of an estimated . 1,800 crore during June.` The trigger: the ` . 4.20 dividend announced by the fund. On a net asset value (NAV) of ` . 14.69, the dividend yield worked out to 28%. Within days of the announcement, the fund's corpus grew 5000% from ` . 36 crore to about `. 1,850 crore as deeppocketed investors poured money into the scheme to escape tax through dividend stripping.
Though dividend from mutual funds is not really a gain, savvy HNI investors use such opportunities to reduce their tax on the capital gains from other investments.They put large amounts in funds that have announced big dividends just before the payout date. A few days later they pocket the tax-free dividend and then show the reduction in the NAV as a capital loss that can be adjusted against capital gains from other investments.
"\Dividend stripping is not an illegal practice but certainly a questionable one\. By paying out very high dividends in obscure, underperforming schemes, fund houses are facilitating the exploitation of a legal loophole to avoid tax. The DWS Investment Opportunity Fund from Deutsche Mutual Fund has been a listless per former, having underperformed the largeand mid-cap fund category and the BSE 200 index in the past five years. But the direct plan of the fund paid out ` . 7 dividend on June 25. On an NAV of ` . 29.46 per unit, this works out to almost 24%. After the announcement, the fund's AUM jumped 150% from ` . 120 crore at the end of May to over ` . 300 crore in June.
The JM Balanced fund is another example of how the tax avoidance opportunity from dividend stripping can drive the AUM. A long-time also-ran hybrid scheme, it witnessed inflows of almost ` . 3,000 crore after its quarterly payout option declared a dividend of ` . 4.75 per unit in June.The fund's regular dividend option paid ` . 5.20 in January (yield 18.7%) and `. 8.87 in March (yield 40%). Anybody who invested in the fund in January has got back 50% of the invested amount as dividend and will be able to adjust the notional loss against other gains.
Experts feel such tactics can prove counterproductive for the mutual fund industry . If fund houses indulge in practices that facilitate tax avoidance, the government may not offer the mutual fund industry any tax concession it is seeking. The taxman has placed a few hurdles in this much-travelled route to tax avoidance. The notional loss caused by the dividend payment can be claimed as a loss only if the units were bought three months before the record date or are held for at least nine months after the dividend payment. If the units are sold before nine months, the loss will be disallowed under Sec 94(7) of the Income Tax Act.
This means an investor cannot use dividend stripping as a short-term affair. The rule forces the investor to think long term. If he wants the tax adjustment benefit, he will have to remain invested for at least nine months.
Though this means the investor will have to carry the risk for the next nine months, it's a problem that can be fixed easily by creating a hedge. If one had invested ` . 12 lakh in the Reliance Quant Plus Fund in June, the value of his investment after the dividend of ` . 3.4 lakh would be around . 8.6 lakh. To guard this sum against a ` possible decline in the stock market till March 2016, he can sell two lots of the Nifty worth around ` . 8.5 lakh in the futures market.
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds
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