Tax Benefits on Investing in Mutual Funds
Despite having different investment objectives, there are certain key requirements every investor has – wealth creation, regular returns, and tax deduction. While there are lots of investment options in the market, most offer returns that are taxed as per the Income Tax rules. This is where Equity Linked Savings Scheme (ELSS) or tax-saving mutual funds step in. Let us get to know all about it.
How do tax-saving funds work?
ELSS funds are funds in which you invest your corpus in equity or equity-related instruments. Most investors should these funds owing to the tax exemptions they offer as per Section 80C of the Income Tax Act. These funds come with short-term risks; however, they maximize capital appreciation over time; plus, the risk is much lower in the long run.
Key benefits of ELSS funds
ELSS mutual funds offer the following benefits –
- Tax savings of up to Rs. 46,800 per year
- Equity exposure of such funds offer higher returns as compared to traditional tax saving options
- Short lock-in period of 3 years, shortest among all 80C investment options
- Provision for fixed monthly investments in the form of SIP or Systematic Investment Plan
- Easy and convenient investment options – can be done from the comfort of one’s home
Who should invest in these funds?
Investment in ELSS funds is an ideal option for the following types of investors –
- First-time investors – Tax-saving mutual funds are ideal for first-time investors who get to taste the equity market in addition to tax benefits. Though equity funds come with higher risk, the same is generally short-term; the risk is much lower for investments made for more than 5 years. Plus, the best way to start out is to invest in SIP or Systematic Investment Plan that offers scope for exceptional returns.
- Salaried individuals – For the salaried class, tax savings should be among the top annual financial goals. And ELSS funds don’t just help with tax savings; they also make plenty of room for wealth creation over long-term investment horizons.
Tax Deduction as Per Section 80C
The Income Tax Act’s Section 80C makes provisions for tax benefits on mutual funds. These benefits extend to the principal amount invested in ELSS funds. The cumulative deduction benefit allows you as the investor to avail a tax deduction of up to Rs. 1.5 lakhs.
Further, tax-saving MF schemes also come with a mandatory lock-in period of 3 years. On redeeming the units at the end of the said lock-in period, you will receive LTCG or Long Term Capital Gains. As per Section 80C, these gains are not taxable up to a maximum of Rs. 1 lakh in a financial year. Above this limit, any LTCG is taxable at the rate of 10% of the gains sans indexation.
Start investing in tax-saving mutual funds today if you haven’t already! To do so, you need to carefully develop your portfolio based on individual requirements. Use smartphone apps like Tata Capital’s Moneyfy app that allow you to compare different funds and choose the right one based on your risk tolerance, investment approach, and other key requirements.
