The simplification of the income-tax regime in Budget 2005, where individual rebate limits on various tax-saving instruments were replaced by a uniform total limit of Rs 1,00,000, has brought all such instruments on to a level playing field. The rationale for investing in tax-saving instruments, therefore, has changed from "how much more can I save on taxes" to "how do I gain (from a particular investment)". Two major investment classes that have thus been brought on par (from a tax-saving perspective) are mutual funds (MFs, earlier rebate limit: Rs 10,000) and unit-linked insurance plans (ULIPs, earlier rebate limit: Rs 70,000).

Now that you get equal tax-saving benefits from MFs and ULIPs, which one do you pick? Here one should keep in mind a crucial difference between the two: ULIPs offer insurance cover, MFs don't. However, both give you exposure to equity as well as debt markets. Here are some pointers that may help you decide:

Holding Period

If you're looking at the short term, MFs are the better option. That's because you are free to withdraw your money at any time (for non-tax-saving MFs, and some fund houses charge a small fee if one withdraws in a very short period of, say, three months). ULIPs have long lock-in periods (minimum is around three years), and tax-saving MFs have a lock-in period of a flat three years. So, either way, MFs look good in the short term. Another advantage of MFs is liquidity; you get your cheques faster, within two to three days of withdrawal.

Cost Structure

From a cost perspective, MFs work out cheaper in the short run, and ULIPs are more cost-effective in the long run. In ULIPs, part of your premium payments goes into risk cover for insurance, and the remaining goes into investments. But the main drawback in the initial stages is the cost insurance companies incur to get the business (agent commissions), which can be as high as 20-30 per cent of your premium in the first year. Most of these charges are recovered within the first few years, after which a management fee (of around 1 per cent) is the only expense incurred.

MFs, on the other hand, are subject to guidelines issued by SEBI (Securities and Exchange Board of India, India's stock market regulator), which stipulate that expense structures (fund management fees, brokerage expenses, etc.) for MFs cannot exceed 2.5 per cent for equity plans and 2.25 per cent for debt plans.

R. Raja, VP (Marketing), UTI Mutual Fund, asserts that in most cases, fund houses maintain expense structures lower than SEBI stipulations. But MFs have to maintain this expense structure throughout the time period of a scheme, which is why ULIPs make better sense in the long term.

Then, ULIPs also provide a certain degree of flexibility. The distribution of the premium between insurance (risk cover) and investment heads can be altered, and you can also switch between sub-plans. A caveat may be in order here: the price of life cover in a ULIP is higher than in conventional insurance, so if you're looking to combine life insurance and investments, it's a better idea to get term assurance cover and invest separately in a mutual fund.

Commitment

If you're investing in ULIPs, you have to stay committed for the long haul. Not so for MFs, where three years can be considered to be long term. If ULIPs give you the option of putting in small amounts of money through premium payments, so do systematic investment plans (SIPs) of MFs, where investors can put in amounts as low as Rs 500 per month. Says Krishnamurthy Vijayan, CEO, JM Capital Management: "While you do have the option of investing small amounts in ULIPs as well since they take the shape of premiums, you are committed to investing every month (or periodically), and unlike in the case of a mutual fund sip, your first few instalments are practically wiped out by the load/brokerages/costs charged, and a relatively small portion of your initial few years' premium actually gets invested in your chosen asset class." So, to get adequate returns from ULIPs, you have to stick around till those costs are taken care of.

Transparency

Do you know where your money is being invested? That crucial piece of information is something insurance companies are not very comfortable giving out. Though things have changed for the better after the entry of private insurance players, the insurance industry still compares poorly to its mf counterparts in this regard. Offer documents of mutual funds have comprehensive details on where and how your money would be invested, but unit-linked schemes don't always provide that sort of information. MFs also regularly disclose details of their full portfolio of investments, so investors are always in the picture.

All said and done, ULIPs have one distinct advantage over MFs, and which is that investment and insurance are conveniently packaged into one. Says Puneet Nanda, Head of Investments, ICICI Prudential Life Insurance: "Most people simply don't have the time to go through diverse investment options and this bundled structure works out well for the investor." You may be different, in which case your choice may also differ. For the time-starved others, ULIPs should be a natural choice.

Readying For July

Filing tax returns can be harrowing if you don't know how to go about it. Here's a quick guide to the most hated annual ritual.

By Priyanka Sangani

It's May, and as the scorching summer heat begins to drive you up the wall, another task has you wishing this were a different part of the year. The task, of course, is filing tax returns. But hang on for a second. Isn't the deadline for filing returns July 31, which is still nearly three months away? Yes indeed, but in tax matters, as any careful investor will tell you, procrastination is not the best strategy, particularly since filing returns involves a load of paperwork, and mistakes can cost you dear. Says Gautam Nayak, a chartered accountant (CA): "While the simplest reason to file in advance is to avoid the last-minute rush, this way you also get enough time to make sure all your papers are in order, and also get the tax refunds, if any, sooner."

The filing process, if you're salaried, begins with receiving Form 16 from your employer (which you should have received by now, since employers are given a month's time from the closure of the financial year, March 31, to give Form 16 to their employees). It contains details of your salary, deductions, redemptions from investments (such as from National Savings Certificate, where the interest is subject to taxation), etc.

You then need to fill out the form Saral 2D and attach Form 16 with it, along with other enclosures such as documentary proof of any rebate you claim under Section 88 (life insurance premium receipts, public provident fund receipts), Section 80D (medical insurance) or Section 80G (any donations you may have made to charitable institutions in the past year). Housing loans are another category where you can claim tax rebates; interest paid up to Rs 1,50,000 towards housing loans can be set off against your income. The lending institution provides the necessary certificate that you need to attach with Saral 2D.

You also need to submit details of any additional income (other than your salary) that you may have earned, along with documentary proof. For example, if you've redeemed any mutual fund investment, the profit you earned is subject to capital gains tax. Of course, you would save on this had you invested in Capital Gains Bonds, in which case you have to attach Form 54E with your returns. Redemptions of LIC policies or fixed deposits are non-taxable, but it's still a good idea to show them up in your returns. Also, if your annual income is over Rs 1,50,000, you have to submit Form 12ba (which details perks) as well.

What if you've switched jobs inside FY 2004-05? In that case, you have to submit two Form 16s with Saral 2D. If for any reason your earlier employer did not provide you with a Form 16, you then need to submit some sort of proof of tax deduction from your (earlier job's) salary. A salary slip is acceptable, along with a letter from you detailing the reasons for not providing Form 16 for the previous job.

If you're a businessman, professional or consultant, the process of filing income-tax returns is very much the same. Businessmen have to submit their balance sheet (by October 31) instead of Form 16, and professionals/consultants have to submit Form 16A along with Saral 2D. Plus, "a tax audit will need to be done if a business's turnover exceeds Rs 40 lakh, and if the annual receipts of a professional/consultant exceed Rs 10 lakh", informs Ameet Patel, Partner, Kanu Doshi Associates. The audit report will then have to be submitted along with the returns.

Given the plethora of forms and receipts that you have to wade through and organise, it's not a bad idea to start right away. Before the heat gets to you.