Entry loads have been waived off on applications that are submitted directly to the mutual fund house. For MF investors, who invest either by way of SIP (Systematic Investment Plan) or as bulk investing, it could mean saving quite a sum of money – around 2% of the investment amount. So consider investing directly in ELSS (Equity Linked Savings Scheme) as it could be a smart and cost-effective way to do so. If you don’t have the money, churn the existing ELSS portfolio – as entry loads are not applicable for direct investing.

Let’s look at the 2 strategies that you could use to save tax; you may adopt any of the two that suits your situation:

SHUFFLE STRATEGY

As per the Income Tax Act, ELSS schemes are subject to a lock-in period of three years from the day of investing. And since there is no long-term capital gains tax for equity funds sold after a year of purchase, shuffling ELSS schemes practically entail zero costs. So how does the shuffle strategy work? Assume John had been investing Rs50,000 in ELSS every year for the past 6 years. Since there is a lock-in of three years for ELSS, his/her investment of last two years would not be redeemable. But those investments made more than three years ago could be redeemed and invested back into the fund to gain fresh tax benefits. Section 80C of the Income Tax Act, allows tax deduction up to Rs 1 lakh of ELSS investments made in any financial year for an individual.

Earlier Section 88 had a condition for claiming rebate that the investment should be made out of the income chargeable to tax. This was subsequently removed to provide relief to the individual tax payers. Current provisions for claiming deduction under Section 80C do not contain this restriction. Therefore, investments could be made out of the current year’s taxable income or even the past accumulated savings/investments to claim the deduction from taxable income by an individual tax payer. While previously, such reinvestments attracted entry loads, the new SEBI rule has done away with such costs for direct investing.

In this shuffling (investment) process, there is a possibility that the investor might make small profit or losses since the Net Asset Value (NAV) might move up or down during the shuffle process. Such shuffles while helping get tax benefits also gives a chance to have a relook at the MF portfolio and prune investments if necessary.

Shuffle it this way:

• Fill up a redemption form to redeem your old ELSS (3 years or more)
• Opt for direct credit to your bank account
• Pick up application form for now investing in an ELSS
• Fill and submit it directly to the mutual fund house (you save on entry loads)
• Investment statement would be sent to your address
• Use these statements for tax purposes

SWITCHING STRATEGY

Another quicker method is that of switching out proceeds to a liquid fund of the same fund house and switching it back into the same ELSS fund of the same fund house. Switching refers to the process of transfer of money from one scheme of a fund house to another scheme. While for taxation purpose, such switching is considered as redemption and taxed accordingly, the advantage for investors is in terms of getting NAV of the same day. So for instance, if an investor switches from an equity scheme to a liquid scheme, the same day NAV is applicable.

How does it work? Say for instance, an investor with previous ELSS investments does not have money to make further investment in the current financial year. He could consider switching it to a liquid fund and back into the ELSS fund. There are no loads applicable for doing it if done within a short period (10 days or lesser). At least that’s what Franklin Templeton MF and ICICI Pru MF allow for their respective schemes. The recent SEBI rules also state that waiver of loads would be applicable for “additional purchases done directly by the investor under the same folio ad switch-in to a scheme from other schemes if such a transition is done directly by the investor.”

Switch it this way:

• Fill up a switch request form to switch from ELSS to a liquid scheme (of the same fund house)
• Switching happens on the same day of NAV
• A statement is sent by the MF house to your address
• After a few days, switch it back to ELSS
• Again a statement is sent by the MF house to your address
• Use the latter statement for tax purposes

So, now on, ensure that you pocket the tax breaks the government has given you – of course without shedding that extra penny.

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