Check the tax benefits investors get by investing in Mutual Funds? What is the tax saving advantage of mutual funds?
Tax Savings Mutual Funds
A Mutual Fund is a fund which primarily collects money from the public and then invests the same in specified securities on behalf of its investors. Mutual Fund is a trust which takes its schemes to some policyholders and in turn safeguards their savings. Every mutual fund scheme is different in terms and conditions and represents an unbiased right in the benefits of the mutual fund for every fund holder.
Mutual Funds can broadly be categorized into two categories.
- Debt Mutual Funds.
- Equity Mutual Funds.
Equity Mutual Funds are those funds which invest a significant slab of their investments in Equity Shares whereas Debt Mutual Funds are mutual funds which invest a major chunk of their investment in Debt/ Fixed Income earning instruments.
As an investor, the assessee would like to get maximum returns on his investments, but the taxpayer may not have the time to study the stock market continuously to keep track of them. Assessee needs a lot of time and knowledge to decide what to buy or when to sell. A lot of people take a chance and speculate, some get lucky, most don’t. Mutual funds offer the following advantages to the assessee.
Guidelines for Tax Saving Mutual Funds
Tax Saving Mutual Funds in India usually abide by the following guidelines while permitting tax benefits on their plans.
- Income Tax benefits to be mentioned under the “objects of the offering” column.
- Any exclusive tax advantages for the mutual fund company and its shareholders by specifying the section number of the Income Tax Act without revealing the content of the section.
Things to consider before entering a Mutual Fund scheme
Before going for the best-suited tax saving mutual fund, it is vital for an investor to consider certain factors like.
- Consider parameters like the current performance of the fund in the market, expenditures likely to be incurred, the method of investment, etc. to guarantee that the investor starts considering his fund at par with the usually diversified equity fund which could lead to inappropriate asset allotment.
- Invest in the promising market and steer clear from risks.
- Investors should preferably invest in funds where the principal assets are chiefly equity funds.
- To make money include more equity funds in your investment portfolio and invest in rewarding mutual funds.
Tax Benefit of Investing in Equity Mutual Funds under Section 80C
Equity Mutual Funds are those Funds wherein a major slab of the amount is invested in equity market i.e. the stock exchange. These ELSS Funds purchase the shares either through IPO or the stock markets.
The amount invested in these mutual funds can be claimed as a Deduction under Section 80C. While there is no limit for investing in these mutual funds, the maximum amount of deduction that can be claimed under Section 80C for investing in these type of Mutual Funds is Rs. 1,50,000/-.
This Deduction of Rs. 1,50,000/- is allowed u/s 80C is the total accumulative deduction which is allowed in any financial year for investments in various specified instruments. The most famous of these instruments under which Deduction under Section 80C can be claimed are listed below.
- PPF-Public Provident Fund Account.
- Pension Plans.
- Life Insurance Policy-LIC.
- National Savings Certificate.
- Tax Saving Fixed Deposit.
- Repayment of Principal Amount on Home Loan.
Lock-in period of Equity Mutual Funds
The lock-in period of equity mutual funds which are allowed to be claimed as a deduction under Section 80C is three years. In other words, the mutual fund cannot be sold before three years.
The lock-in period of 3 years of Equity Mutual Funds is the least when compared with the five year lock-in period of other popular tax saving instruments like PPF Account, National Savings Certificate, Tax Saving Fixed Deposit.
Tax Exemption for Dividend paid on Mutual Funds
The mutual funds frequently pay out dividends to its Investors. The dividend received by the investors from these mutual funds is tax-free in the hands of the investors. In other words, no tax is to be paid by the investors on the dividend that is received from such mutual funds.
There is no extreme limit on the amount of exemption that can be claiming tax exemption on Dividend received from Mutual Funds.
Capital Gain Tax on sale of Mutual Funds
The value of a mutual fund is denoted by its Net Assets Value (i.e.NAV). The Net Assets Value keeps revising on a daily basis based on the performance of the mutual fund. A mutual fund is always purchased and sold at its prevailing Net Assets Value.
The Gains arising on the sale of a Mutual Fund are of 2 types – Long Term Capital Gains and Short Term Capital Gains. Tax on sale of Mutual Funds held Long Term/Short Term is mentioned below:-
- The tax under Long Term Capital Gains: If the equity mutual fund is held for more than one year, the gains arising from the sale of the mutual fund are entirely exempted from the levy of any capital gains tax. There is no maximum limit on the amount which can be claimed as an exemption on the sale of mutual funds which have been held for more than one year.
- The tax under Short Term Capital Gains: If the equity mutual fund is held for less than one year, the gains arising from the sale of mutual fund would be levied at a concessional rate of 15%. There is no maximum limit on the amount would be taxed at this concessional rate of 15% under Section 111A.
For a detailed read on tax on the sale of Equity Mutual Funds, you may refer this article on Capital Gains Tax on Sale of Mutual Funds.