Recently, I requested for change of option from dividend payout to reinvestment option in one of the mutual fund schemes that I had invested. I was surprised to note that they had deducted STT @ 0.25% from my account, mentioning that it is a switch from one option to other and STT is payable. I seek your opinion on this issue.

? Mukhattar Singh

Shifting from one option of any MF to another option, even of the same scheme of any MF is considered to be a ‘transfer’ and therefore, provisions of capital gains become applicable. However, shifting from dividend option to dividend reinvestment option is not a transfer and therefore, no STT is applicable. You should take up this matter with the mutual fund concerned and request corrective action from their end.

Is the 80D benefit available for LIC Health Plus Plan? Could you provide more details on the exact amount of deduction available?

?Aishwarya

Till now, deduction up to Rs 10,000 paid out of income chargeable to tax on premiums paid towards the health of the assessee himself, his spouse, dependent children or dependent parents was allowed, only if the payment was effected by cheque (yes, by cheque and no other instrument, including credit cards!) by an individual. However, where an individual has insured a senior citizen, who may be himself or his spouse or dependent parents, a higher ceiling of Rs 15,000 was applicable.

The recent FA08 has enhanced the limit from Rs 10,000 to Rs 15,000 on premiums paid towards the health of the assessee himself, his spouse and dependent children. If the individual or the spouse is a senior citizen, the limit higher at Rs 20,000. Note that this base has excluded parents, senior citizen or otherwise because –

An additional deduction of up to Rs 15,000 has been extended to an individual on premiums paid for his parents. If the parent is a senior citizen, an enhanced limit of Rs 20,000 is applicable.

The existing condition of ‘dependent’ with respect to parents is dispensed with. Moreover, now the premium can be paid by any mode other than cash instead of only by cheque as per the old provisions.

The same benefit is also available to an HUF, which has insured any or more of its members. If one or more of the covered members is a senior citizen, the deduction claimed has a limit of Rs 20,000 and Rs 15,000 otherwise.

Can you please advise me that when investing in a mutual fund, should I opt for a growth or dividend option? I always opt for the dividend option. But my agent is insisting on opting for the growth option, as returns are higher in this than in the dividend option.

? Kunal Kumar

Returns for growth and dividend options are not different as the dividend is assumed to be reinvested in the scheme. Therefore, you will find, whenever the returns for any particular fund are published, there is only one figure and not different ones for growth and dividend options.

However, in practice, due to market conditions or even lethargy on the part of the investor, the dividend stays in the bank and doesn’t get reinvested immediately. Plus, if the investor were to reinvest the dividend back in another equity fund, it amounts to reinvestment in the same asset class. Therefore, in our opinion, the growth option works best. But as explained above, it is not because the return from the growth option is higher.

My query is regarding a comparison between tax saving bank FDs and PPF. If one has contributed to PPF and could claim tax exemption for this contribution, does this affect the higher effective yield on the tax savings bank deposit? I thought it would still hold good, if one claims 80(C) for the bank deposit and not the PPF contribution. The latter would just be an investment, giving a tax-free return of 8%.

? R Narayanan

Your contention is true. However, there is yet another way to look at it. One does not claim Sec 80C deduction specifically for PPF or bank deposits or life insurance premiums, etc. All these contributions to the schemes, which are eligible for the benefit of Sec 80C are added up and a deduction is claimed with the upper limit being Rs 1 lakh.

Therefore, a good comparison between PPF and bank deposits would be to compare their respective interest rate. It is 8% tax-free for PPF and around 10.5%-11% taxable for bank deposits. Which is better than the other will obviously depend upon the tax zone of the investor.

I have a query regarding my PPF a/c with SBI, which matured on March 31, 2008, after a period of 25 years (extended by 10 years). In case I withdraw my entire accumulated amount in Dec ’08 (around December 22, ’08), up to what period is the interest calculated?

?R Gopalswamy

The interest will be paid up to November 30, 2008. If you so desire, you can extend the PPF account for an additional block of 5 years.

The authors may be contacted at wonderlandconsultants@yahoo.com