Mutual Funds: Now invest in CPSE ETF to save tax under Section 80C

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Bharat 22 ETF’s portfolio is diversified across six sectors—basic materials, energy, finance, fast-moving consumer goods, industrials and utilities. It is managed by ICICI Prudential Mutual Fund.

Individuals can now invest in Central Public Sector Enterprises (CPSE) exchange-traded fund (ETF) and get tax deduction under Section 80C of the Income Tax Act, just like investing in equity-linked savings schemes (ELSS). Finance Minister Nirmala Sitharaman announced in her Budget 2019 speech that the government will launch its CPSE ETF in a tax-saving mutual fund format.

“ETFs have proved to be an important investment opportunity for retail investors and has turned out to be a good instrument for Government of India’s divestment programme. To expand this further, the government will offer an investment option in ETFs on the lines of Equity Linked Savings Scheme (ELSS). This would also encourage long term investment in CPSEs,” she said in her maiden Budget speech.

In 2014, the government launched CPSE ETF, which consists of government-owned companies. Since then the government has launched a few more tranches. The CPSE ETFs was launched by the government to divest its shareholding in select state-owned companies and is beneficial for investors looking to invest in stocks of public sector enterprises in a cost-effective manner and create wealth over the long term. One of the major advantages of CPSE ETF is the low expense ratio as compared to other mutual funds.

The Bharat-22 ETF tracks 22 companies—19 public sector companies and three private sector firms where government holds minority stake. Bharat 22 ETF’s portfolio is diversified across six sectors—basic materials, energy, finance, fast-moving consumer goods, industrials and utilities. It is managed by ICICI Prudential Mutual Fund. The weightage of each individual stock is capped at 15% and each sector is limited to 20% of the overall index weightage. Similarly, Reliance Mutual Fund is managing CPSE ETF, which comprises stocks of 11 bluechip PSUs — ONGC, NTPC, Coal India, IOC, REC, PFC, Bharat Electronics, Oil India, NBCC, NLC India and SJVN.

Benefits of ELSS
ELSS has the lowest lock-in period of three years as compared to other tax-saving instruments such as unit-linked insurance plans (five years) Public Provident Fund (15 years), National Savings Certificate and 5-year bank fixed deposits. If a taxpayer in the highest 30% bracket invests up to `1.5 lakh in ELSS in a year, he can save as much as `46,350 in taxes. At present, ELSS has lower investment threshold as the minimum investment amount is `500 and and one can invest a lumpsum amount or invest every month through Systematic Investment Plans (SIPs).

One of the biggest advantages is that an investor will not have to look at the performance of individual stocks regularly. The fund manager will investment in diversified stocks and sectors, which reduces the risks in case of any cyclical markets volatility. However, returns are dependent on the fund manager’s ability to pick the right stocks.

An individual taxpayer must consider ELSS for discretionary tax-saving investments. However, the returns are taxable on redemption as long-term capital gains is applicable after one year at 10%. There is no cap or limit on how much an individual can invest in an ELSS but the tax deduction will be up to `1.5 lakh a year.

Returns from ELSS schemes are slightly better than other equity mutual fund schemes. As fund managers have the mandate to invest the money for at least three years, they can take long-term calls and need not worry about quick or fast redemption from the scheme. That reduces the volatility and increases the consistency and the returns also improve. Moreover, as many invest in ELSS through SIP, the book grows with every three-year lock-in, which helps the fund manager to grow the assets and earn higher returns.

Experts say with tax benefits like ELSS, CPSE ETFs will be attractive for individual investors for creating long-term wealth. They suggest that investors should prefer the growth option because of the compounding benefits in the long run and increase in NAV of the fund.