Tata India Tax Savings Fund

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Tata India Tax Savings Fund scheme seeks long-term capital growth. Investments in equity would be at least 80 per cent of the corpus, while allocation to debt and money market instruments can go up to 20 per cent.

Tata India Tax Savings Fund which hasn't shown a big outperformance of category over the years but manages strong long-term returns. It has enjoyed a three-four star rating for much of the last nine years. It has now attained a five-star status.

Tata India Tax Savings Fund strategy relies on buying businesses which have compounding characteristics, strong growth potential and a high capital efficiency. A part of the portfolio is allocated to stocks in special situations arising out of the market, industry or company developments. This 'value' characteristic is likely to have helped the fund's returns in the last one year, when cyclicals have bounced back. The fund has lower large-cap weights than those of the category, at about 50 to 55 per cent, with mid-cap weights at 30 to 35 per cent and small-cap exposure at 15 to 20 per cent.

Tata India Tax Savings Fund performance relative to the category and the benchmark was somewhat patchy until 2009. But the three-year returns are now a good 8 percentage points ahead of benchmark returns and 3 percentage points ahead of the category returns. Five-year returns show equally impressive outperformance of 8 and 2 percentage points, respectively.

Historically, this fund has been good at containing losses during bear phases such as 2001, 2008 and 2011. It barely beat its benchmark during bull phases like 2006 and 2009. But it has aced the last bull phase (which started in 2014).

Tata India Tax Savings Fund for investors with some risk appetite and seeking a multi-cap approach to tax planning.

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Tracking Error

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Tracking Error is performance measurement term which quantifies the extent to which mutual fund portfolio's return is at variance with the underlying benchmark. In the case of Index Funds, this number is very important. An index fund is expected to replicate the index and therefore have a minimal tracking error. Index funds are compared and ranked on the basis of their tracking errors.

If tracking error is measured historically, it is called 'realised' or 'ex post' tracking error. If a model is used to predict tracking error, it is called 'ex ante' tracking error. The former is more useful for reporting or analysis purposes, whereas exact is generally used by portfolio managers to control risk to satisfy client guidelines.

Tracking error is mathematically the same as Active Risk, and has historically been used in the context of index portfolio or fund management, but, especially in Europe, is now typically used to describe the standard deviation of returns, either active or passive. The active return is the difference in the return of a portfolio and its benchmark. An index manager aiming to match the return of a benchmark index seeks to minimize realised tracking error, i.e., the standard deviation of returns about the benchmark. An active portfolio manager, on the other hand, aims to achieve a positive active return with a low active risk.

Tracking Error = stdev(RETURN(portfolio) - beta * RETURN(index))

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Filing Income Tax Returns deadline extended till 31 August 2018

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The extension in the ITR filing due date comes as a relief to those who are yet to file their income tax returns as late ITR filing could attract a penalty of up to ₹ 10,000

In a relief to individual taxpayers, the income tax department on Thursday extended the last date for filing tax returns by one month.

The due date for filing the income tax returns has been extended to 31 August from 31 July, the income tax department said in a statement.

This will be a relief for taxpayers who are yet to file their tax returns as from this year, as per a budget provision, late filing of tax returns will attract a penalty of up to ₹10,000.

A penalty of ₹5,000 will be levied if the return is filed after the due date but before 31 December, as per this new provision applicable from this year. The penalty will be ₹10,000 after 31 December.

However, if the taxpayer's income is less than ₹5 lakh, maximum penalty levied is capped at ₹1,000.

While return filing due date has been extended, taxpayers are still unsure about how the penalty applies to them if they cannot file by 31 August. People are enquiring if penalty applies when they have no tax payable or if the taxable income is less than ₹2.5 lakh and they are filing the tax return only for refund, he added..

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Forward Contracts

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Forwards are over the counter derivatives that enable the buying or selling of an underlying security on a future date, at an agreed price. 

The terms of a forward contract are as agreed between counterparties and include: the underlying that is being bought or sold; the quantity of the underlying; the price agreed upon by the two parties; and the date of settlement. 

There is an obligation for the buyer to pay for what has been bought and receive delivery thereof, and for the seller to give delivery of what has been sold and receive payment for the same. 

The actual price at the time of settlement may differ from the price that was agreed upon. 
If the market price at the time of settlement of the contract is higher than the agreed upon price, the buyer gains but the seller loses. If the price is lower, then the buyer loses but the seller gains. 

 

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Tax Deductions

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Deduction is the reduction that you can claim under different heads to cut your tax liability, thereby reducing the income tax you pay.

Section 80C
Section 80C offers a window of investment opportunities on up to Rs 1.5 lakh investment in each financial year. This benefit is available to everyone, irrespective of their income levels. For instance, if you are in the highest tax bracket of 30 per cent, the investment of Rs 1.5 lakh under this section will save you Rs 46,350 (including education and Secondary and Higher Education cess) each year. The various financial products that qualify for Section 80C benefits are as follows:

• Life Insurance premium payment
• Home loan principal repaid, wherein the principal portion of the home loan EMI qualifies for deduction under Section 80C
• Employees Provident Fund (EPF) where 12 per cent of your salary is deducted every month and an equal amount is contributed by your employer and put into a fund maintained by the government or your company's provident fund trust. Only your contribution towards the fund is eligible for deduction from taxable income of the basic salary towards EPF
• Tuition fees up to two children can be claimed for. However, any payment towards any development fees or donation to institutions is excluded
• Contributions to the public provident fund
• Investments in the senior citizens savings scheme
• Savings in notified term deposits in scheduled banks with a minimum period of five years under the bank term deposit scheme, 2006. Savings in post office time deposits with 5-year lock-in
• National Savings Certificate, five-year government-backed security available at post offices
• Investments in tax planning mutual funds, popularly known as Equity-Linked Savings Scheme (ELSS)
• Investments in pension plans
• Investment in Sukanya Samriddhi Yojana
• Apart from the Rs1.5 lakh deduction allowed under Section 80C, an additional Rs50,000 deduction is available on investment in National Pension System (NPS)

Other Deductions
Section 80D: Premium payments towards medical insurance for self, spouse, children and parents qualify for deduction. You can claim up to Rs 25,000 or Rs 30,000 (if you or your spouse is a senior citizen) for self, spouse and dependent children. Additional deduction of up to Rs 25,000 or Rs 30,000 is available for premium paid parents' policy. Preventive health check-ups up to Rs 5,000 within limits also qualify for tax deductions under section 80D. This limit has been increased to Rs 50,000 for senior citizens w.e.f. April 1, 2018.

Section 24: Interest on home loan with a maximum deduction of Rs 2 lakh as interest payment on home loan.

Section 80E: Interest on educational loan qualifies for deduction on full-time studies for any graduate or post graduate course. However, there is no benefit on principal repayments.

Section 80G: Donations to funds and charities from 50 or 100 per cent of the donated amount, depending on the charity, is deductible from income. But this shouldn't exceed 10 per cent of your gross total income.

Section 80DD: Deduction of up to Rs 75,000 or Rs 1.25 lakh on the medical treatment of a dependent with a disability, certified by a medical authority.

Section 80DDB: Deduction of up to Rs 40,000 for an individual under 60 years of age, Rs 60,000 and Rs 80,000 for very senior citizens on costs incurred for treatment of specified illnesses such as malignant cancer, chronic renal failure, Parkinson's disease and other listed diseases. Deduction limit under this section has been increased to Rs 1 lakh for senior citizens w.e.f. April 1, 2018.

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Invest in Arbitrage for short Term

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Equity arbitrage funds, a sub-category that offers 'debt like return and equity like taxation benefits', have also been hit by the new tax. The returns from equity arbitrage funds are comparable with those of short-term and ultra-short term debt funds. Investors, especially HNIs, used to park their short-term funds in these funds to gain from the tax advantage. While debt fund investors were forced to pay a dividend distribution tax of 28% (ie 25% plus 12% surcharge), there was no dividend distribution tax (DDT) here. 

* 25% + 12% Surcharge + 4% cess
# 30% tax + 15% surcharge + 4% cess for upto 3 years; 20% (with indexation) + 4% cess after that. If we assume 8% returns from debt funds and 5% inflation rate, inflation adjusted tax will be only 20.8% of 3% (ie 0.624%). and on the original gain of 8%, the effective tax rate works out as 7.8%. Data as on 5 Feb 2018 

Similarly LTCG were tax free here after a year of holding, while debt fund investors paid 20% tax even after holding for three years. Though equity funds will now be subjected to LTCG tax and DDT, experts say the arbitrage funds are still the best option to park short-term funds. Though the sheen has reduced, equity arbitrage funds continue to generate better post-tax returns than other alternatives 

The tax rate is still attractive for equity arbitrage funds. While debt funds investors pay a total DDT of 29.12% after 1 April, it is only 10.4% for equity arbitrage funds. Similarly, the tax advantage is huge for the 1-3 years holding period also. The tax arbitrage differential will come down, but equity arbitrage funds will still remain a good option for short-term investments. Besides, the sudden increase in stock market volatility, triggered by the imposition of the LTCG tax and DDT on equities, is good news for arbitrage funds. The arbitrage opportunity is greater during periods of increased volatility. Usually, carry costs are low when the market is extremely bullish. Risk premiums will be higher in volatile periods like this 

However, the arbitrage opportunity may come down if the correction continues for very long and investor interest in the market wanes. In arbitrage funds, the dividend option makes more sense. The tax rate on short erm capital gains is 15% while dividends will be taxed at 10%. Since there is a tax advantage of 5% in the first year, the dividend option is better 

Arbitrage funds make money by buying and selling in different market simultaneously to corner the price difference. Their risk profile is comparable to that of debt funds. However, these funds can be very volatile in the short term (less than three months). Since NAVs can fluctuate wildly for short holding periods, the ideal investment horizon for this segment is 6-12 months 

SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich - Best ELSS Funds

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How Fixed Deposits Compare With Debt Funds

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Risk-averse investors in general and senior citizens in particular prefer to invest their hard earned money in bank fixed deposits. Even for most of the relatively suave investors, bank FDs still remain the most popular form of short-term investments (less than 5 years). However, if such investors are ready to take a little bit of additional risk in order to increase their returns, then they can consider debt mutual funds.

Here is a brief on debt funds and fixed deposits and the comparison of their features:

Debt funds: Debt fund is a broad category of mutual funds that seek to invest in securities generating fixed income. These securities can be government bonds, commercial papers, certificates of deposits, treasury bills, company bonds, debentures, money market instruments and/or other debt securities. Like other mutual funds, you can buy or redeem the units of debt funds at daily NAVs.

Fixed Deposits: Fixed deposit (also known as term deposit) is a fixed income instrument that offers capital and income guarantee till the date of the maturity of the instrument. The rate of interest also remains the same throughout the tenure of the investment.

How debt funds fare against fixed deposits

Capital protection: Your bank FDs (including both principal and interest component) of up to Rs 1 lakh in each bank is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) in the event of bank failure. Meaning, any bank deposits beyond Rs 1 lakh is as unsafe as any other financial instruments in the event of the failure of the bank.

Although the debt funds do not offer similar capital protection, the safety of such funds can be deduced from their underlying securities. These securities are rated by various credit rating agencies on the basis of their ability to pay back the maturity amount. Generally, debt funds invest in highly-rated securities where the possibility of default is negligible.

Return on investment: Bank FDs offer a fixed rate of interest irrespective of the movements in interest rates. For example, if you invest in an FD of 3 years tenure @ 7.9% p.a., you will continue to receive the same rate of interest till the end of the tenure, irrespective of the increase/decrease in the interest rate for that same tenure in the interim period. In otherwords, the rate of return of your bank FD is guaranteed.

Debt funds on the other hand, do not provide guaranteed returns. The return from a debt fund depends on the interest income earned from the underlying securities, the increase/decrease in the price of the securities, monetary policy and the investment management of the fund manager.

Liquidity: Banks allow premature withdrawal of FDs (except the tax-saving FDs) only in lieu of surrender charges or penalties. The liquidity of debt mutual funds is similar to that of equity mutual funds. Typically, you can withdraw your debt fund anytime without paying any charges.

Investment Costs: Typically, banks do not charge anything for investing in bank FDs. As far as debt funds are concerned, you will have to pay various annual recurring charges such as fund management fee, marketing & selling expense including agent commission, brokerage etc. As per SEBI regulations, the total annual recurring charges have been capped at 2.25% p.a. of the daily net assets.

Tax treatment: Interest earned from bank fixed deposits is added to your annual income for tax purposes. Hence, the tax on interest earned will depend on the tax slab that you come under. So, if your annual income falls in the 30% tax bracket, the interest earned from FD will attract 30% income tax. The banks deduct TDS if the interest earned on your fixed deposits crosses Rs 10,000 in a financial year.

In case of debt funds, short-term capital gains (gains made from investment of less than 3 year) is added to your annual income and taxed at applicable slabs. However, the return on investments of over 3 years is classified as long term capital gains, which is taxed at 20% with indexation benefits. The indexation benefit allows you to factor in inflation while calculating your capital gains. Therefore, even if the rate of returns from debt funds and fixed deposits are the same, you still stand to gain more from debt funds provided you come under 20% or 30% tax bracket and stay invested for more than 3 years.

Choosing between the two

Debt funds definitely score over bank fixed deposits in terms of return on investment, liquidity and tax treatment. Invest in debt funds if you need a place to park your funds but you do not have a fixed investment horizon or may need funds anytime. If your investment horizon is less than 3 months, invest in liquid funds instead of keeping your money in savings account. However, compare the FD rates offered with the returns provided by the debt funds for the same period of time.

SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich - Best ELSS Funds

For more information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

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