How can I save tax through Mutual Funds?

Many mutual funds schemes are tax friendly, especially if you are looking for long term investments. Mutual funds are generally of two types:

• Debt oriented funds
• Equity oriented funds

You can read more about their taxability structure here.

The most tax saving mutual fund scheme is the Equity Linked Savings Scheme (ELSS). ELSS not only allows deduction of upto ₹1.50 lakhs under section 80C of Income Tax Act, 1961 but the returns generated from investing in ELSS are also tax free. The scheme can potentially help you save tax upto ₹45,000, though how much you actually save depends upon the tax bracket you fall under. The scheme has the lowest lock in period of 3 years as compared to all other tax saving options as provided by Section 80C.

The IDFC Tax Advantage (ELSS) Fund - Regular - Growth is one of the high return-generating funds at Groww, with annualized 3 year returns averaging 16.70%. Commensurate with the high return is ts moderately high risk exposure. A regular monthly investment of ₹10,000 into this scheme will help you yield ₹9,92,074 by the end of just five years at historic rate of return.

Another top performing tax saving fund is the Tata India Tax Savings Fund - Regular - Growth. Having generated annualized return of 17.77% over a period of 3 years, this scheme has outperformed its benchmark consistently across time periods. This fund is more suited to you if you are looking for relatively shorter term investments, i.e., for a period upto 5 years. You can earn approximately ₹4,61,572 upon setting aside ₹10,000 each month for three years.

Please note that historic returns do not serve as guarantee for future performance.

If you are looking to invest in tax saving mutual fund schemes, you can contact Groww where we can help you understand the tax implications of investing in detail and design a plan that will maximize your returns.

Mutual funds can be tax saving instruments that not only help in reducing the tax burden but also in increasing wealth. Sec 80C of the income tax act allows investors to claim deductions from their taxable income by investing in certain instruments.

• Equity Linked Savings Scheme (ELSS): An ELSS is a diversified equity mutual fund which has majority of its corpus invested in equity.

Features of ELSS are:

1. Invests in diversified equity and equity related instruments
2. It has a 3 year lock in period
3. Advantage of capital gains and tax savings
4. No age limit

• Capital gains on mutual funds: Gains on equity funds are completely from exempt from tax when the equity funds have been held for over a year.

Mutual funds can be tax-efficient investment avenues that can help reduce your tax burden and at the same time increase your wealth. But not all investments into mutual funds are tax-free under Indian Income Tax Act.

Tax saving through mutual fund:

1. Section 80C Tax benefit of investing in Equity mutual funds:

Only ELSS Mutual Funds offer tax benefits under section 80C of the Income Tax Act. As per this section, one can avail tax exemptions up to INR 1,50,000 by investing in ELSS funds.

Equity Linked Savings Scheme (ELSS)

ELSS is a dedicated mutual fund scheme that allows investors to save tax. It also provides an opportunity for long term capital appreciation. An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high-returns.

Features of ELSS Funds:

• Tax-saving instrument
• 3 year lock-in period
• Can be held even after the completion of 3 years
• Offers dividend as well as growth options

Popular ELSS options are:

• DSP Blackrock Tax saver
• Aditya Birla Sunlife Tax Relief 96
• Franklin India Tax shield

2. Tax Exemption on Dividend paid on Mutual funds:

The mutual funds regularly 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.

3. Capital Gains Tax on the sale of Mutual Funds: 

If you sell your equity mutual funds after a year, the returns will qualify for long-term capital gains tax. Long-term capital gains tax is nil on equity. If you sell your equity mutual funds before a year, you will have to pay short-term capital gains tax of 15 per cent on your returns.

Happy Investing!

When we talk of tax, mutual funds can help in two ways:

1. ELSS Funds: They give you tax benefits under section 80C. You can save up to ₹45,000 in taxes every year by investing in ELSS funds.
2. Equity & Debt Mutual Funds: The tax rate applicable on equity and debt funds can offer advantages in comparison to tax applicable on other investment options.

ELSS (Equity Linked Savings Scheme) funds allow you break tax benefits of up to ₹1.50 lakh under section 80C. How much tax you actually save depends on the tax bracket you belong to. Characteristics of ELSS funds:

• There is no tax on the returns you get from investing in an ELSS fund.
• It has the shortest lock-in period of 3 years among all tax saving options under section 80C. Other options have a minimum of 5 years lock-in.
• It has arguably the highest returns among all investment options under section 80C. While most other options give returns in the range of 6-8%, ELSS funds have historically given returns in the range of 15-20%.
• ELSS funds are equity linked which means they have an exposure to market risk.

Equity and Debt mutual funds are a good investment from a tax perspective:

• Equity mutual funds: They are taxed at a flat rate of 15% if the mutual funds are sold within 1 year of purchasing. After 1 year, there is no tax applicable on them.
• Debt mutual funds: They are taxed based on your income slab if the mutual fund is sold within 3 years of purchasing. However, if sold after 3 years from purchase, they are taxed at a flat 20% with indexation benefit plus 3% cess.

You can understand more about tax on mutual funds here.