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How Can Mutual Funds Aid in Saving Tax

Financial experts suggest that it is good if you start your tax planning process right in the beginning of a financial year. Mutual fund investments can be your tax-efficient investment avenues and can aid in reducing your tax burden while fulfilling its purpose of increase your wealth. However, not all mutual funds are tax saving funds under the Indian Income Tax Act. If you are planning to invest in mutual funds solely for tax benefits then you should definitely invest in Equity Linked Saving Schemes or ELSS. ELSS are the tax saving funds that will help you save taxes under Section 80C of the Income Tax Act. Person investing in ELSS is eligible for tax deductions of up to Rs.1.5 lakh.

ELSS is a specifically dedicated mutual fund scheme that allows investors to save taxes. It also provides a long term capital appreciation opportunity. An ELSS fund manager usually invests in a diversified portfolio. Investment portfolio for ELSSs predominantly consists of equities and equity related instruments that can deliver higher returns. Mutual funds regularly pay out dividends to its investors. The dividend received by the investors from these mutual funds is tax-free.

If a person sells the equity mutual funds after a year, the returns received will qualify for long-term capital gains tax. Long-term capital gains tax is zero on equities. However, if you sell your equity funds in period shorter than a year then you will have to pay short-term capital gains tax of 15 per cent on your returns.

ELSSs have the shortest compulsory lock-in period for the duration three years. Other investment options under Section 80C like Public Provident Fund or National Savings Certificate have a longer lock-in period. The major advantage of tax saving mutual funds is that they are invested in stocks. This indeed makes them an ideal investment option that generates wealth over a period of time. The mandatory lock-in period is an added advantage for investors as it keeps you unaffected by the volatility of stock market.

Investment experts suggest that all tax payers should link their long-term financial goal to the ELSS investments. They advise such a strategy because it would help investors stay focused on their investment objective. If your ELSS fund is performing well then it could be used to achieve your financial goals and you don’t have to sell them once the mandatory lock-in period is over.

As an investor, you can initiate their investment journey through an ELSS for tax benefits as they are tax saving funds. Eventually, you can start spreading your investments further once you attain a better understanding of various available schemes.

Post Author: Amrina

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