If someone ever says that you cannot have the best of both worlds, you may want to show them your mutual fund investments. Not only are mutual funds SIP returns (Systematic Investment Plans) helpful in fulfilling your long term and short term goals, but these instruments also help you save money. How may you ask? Through tax savings!
The mutual fund tax benefit can be enjoyed under Section 80C of the Income Tax Act, 1961. But this benefit is only extended to a particular type of mutual fund. Let’s dig deeper to find out more.
What is an ELSS fund? What is ELSS tax saving?
An Equity Linked Saving Scheme (ELSS) is a type of mutual fund that invests in equities or equity-related securities. But ELSS funds differ from other mutual funds as they have a mandatory lock in period of three years.
Equity linked mutual funds are popular investment vehicles for two main reasons:
- They can deliver inflation-beating returns due to a high concentration in equity.
- They can offer tax benefits under Section 80C.
ELSS is the only mutual fund that qualifies for a tax deduction in India. As per the provisions of Section 80C of the Income Tax Act, 1961, you can claim a tax deduction of up to Rs 1.5 lakh on your investment in ELSS in a financial year. This means you have a chance to save up to Rs 46,800 in taxes every year.
Now that you know how to save tax by investing in mutual funds, you should also know how your profits are taxed upon redemption. Knowing this will help you plan your exit strategy more efficiently.
Taxation of mutual funds in India
Mutual fund taxation is decided as per the asset allocation of the scheme and hence differs for equity and debt funds. Here’s how this is done:
- Tax on equity mutual funds:
Mutual funds with a minimum of 65% allocation in equity are considered equity funds. Gains on investments in these funds held for a year or less are levied short term capital gains tax at 15%. Gains on investments held for more than a year are levied long term capital gains tax at 10%. However, only long term gains exceeding Rs 1 lakh/year are taxed, and any amount below this is tax-exempt.
- Tax on debt mutual funds:
Mutual funds with a minimum of 65% allocation in debt are considered debt funds. Gains on investments held in debt funds for three years or less are considered short term and gains therefrom are taxed as per the income tax slab you fall into for the financial year. Gains on investments held for more than three years are levied long term capital gains tax at 20% with indexation. Indexation basically refers to adjusting the cost of investment after considering the impact of inflation. This reduces the tax liability on your earnings.
If you want to estimate the returns or gains on your mutual fund investments, you can use an SIP calculator. Once you have an idea of your mutual funds SIP returns, you can plan your taxes.
How does an ELSS fund lower your taxability?
Since ELSS funds are equity linked mutual funds with a mandatory lock in period of three years, you stand to benefit from the lower long term capital gains tax of 10%. Moreover, if your gains are less than Rs 1 lakh annually, you may even enjoy entirely tax-free returns.
To conclude, here’s a quick recap of the tax benefits that you can get with mutual funds.
- Tax exemption on ELSS investments up to Rs 1.5 lakh annually
- Tax savings of up to Rs 46,800 each year by investing in ELSS
- Tax exemption on long-term capital gains up to Rs 1 lakh per year for equity mutual funds
- Indexation benefits while calculating long-term capital gains tax on debt mutual funds
Summing it up
Investments in mutual funds like ELSS can offer the best of both worlds – inflation-beating returns and tax benefits. So, you can certainly invest in them if you want the cake and eat it too! Moreover, just by planning your mutual fund investment tenure smartly, you can save a lot of taxes.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
