Dividends from MFs are tax-free for the investor

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: in nature.

Last week, the government reintroduced the bonus on post office monthly income scheme. After this, what would be the effective rate of return on the investment? Secondly, has the interest on Senior Citizen Savings Scheme and term deposits been exempted too?

—Madhur

Earlier, the monthly income scheme of the post office offered a 10% bonus. This was discontinued in February 2006. Now instead of the erstwhile 10% bonus, a 5% bonus has been introduced. This takes the effective rate to 8.9% pa. However, note that the interest is fully taxable. The interest on term deposits as well as Senior Citizen Saving Scheme too is fully taxable. It is only the principal investment on which Sec 80C offers a tax break.

My PPF A/C completed its term of 15 years and now I have got it extended for another block period of 5 years. Kindly advise the tax status of my investments/earnings/withdrawals during the extended period of 5 years after the proposed EET regime is implemented.

—Sharma

As far as PPF maturity goes, the FM clearly stated that it is the intention of the government to move to an EET based system of taxation. This means, investments like those under Sec 80C which enjoy a deduction from income would be taxed upon maturity.

As of now, there is no proposal to tax such investments. However, the FM has stated that he has appointed a committee which will devise the structure and form of an EET system and present it to the Parliament. Only when it is passed, will there be a semblance of clarity, hopefully. This includes ELSS (Sec 10(38)), LIC proceeds (Sec 10(10D)) etc.

For saving my taxes can I invest in SIPs (systematic investment plans)? What is the tax benefit associated with SIPs?

—Geetanjali

SIP is nothing but investing periodically, say monthly, bi-monthly or six monthly in an MF scheme. In other words, it is akin to what recurring deposit is with respect to investing in fixed deposits.

Therefore, SIP per se, does not offer any tax benefit as it is not a product but a strategy for investing. The tax benefit u/s 80C is offered by ELSS schemes of MFs. However, you can invest in ELSS using the strategy of SIPs.