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How Mutual Fund Investments Can Help Save Income Tax

ELSS funds are equity-oriented mutual funds that predominantly invest in equity and equity-related securities.

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How Mutual Fund Investments Can Help Save Income Tax

ELSS schemes also enjoy the benefit of coming under EEE or Exempt, Exempt, Exempt (EEE) category.


Indian stocks have rallied sharply in the past few years, boosting the returns from Equity Linked Savings Scheme or ELSS, a tax-saving mutual fund. According to Valueresearchonline.com, equity linked savings scheme as a category has given 25 per cent return in one year, 13 per cent in three years and 18 per cent in five years. What exactly are ELSS funds?  They are equity-oriented mutual funds that predominantly invest in equity and equity-related securities. ELSS has a lock-in period of three years, which means investments cannot be redeemed before three years. 

Tax Benefits Of ELSS

Investments in ELSS qualifies for qualifies for tax exemptions under Section 80 C of the Indian Income Tax Act. This means that investments up to Rs 1.5 lakh in a year can be claimed as a deduction in a financial year. 

ELSS schemes also enjoy the benefit of coming under EEE or Exempt, Exempt, Exempt (EEE) category. In other words, you get income tax benefits when you invest in an ELSS, the dividends (if dividend option chosen) are tax-free and there are no capital gains at the time of redemption.


Dividend Option In ELSS

The dividend option in ELSS funds helps the investor to realise gains even before redemption.

SIP Option In ELSS

Financial planners suggest investors to opt for the SIP route to invest in ELSS. Systematic investment plan is a investment option offered by mutual funds under which an investor invests fixed amount at regular intervals. By investing over twelve months an investor in ELSS is able to build a disciplined habit. Also, the investor is able to average out the buying price. 

Lock-In Period


This lock-in of ELSS investment is much lower than other tax-saving instruments like Public Provident Fund (PPF), tax-saving fixed deposit and Kisan Vikas Patra.

Income Tax Implications On Gains From Mutual Fund Investments


Here are some other things you need to know about investing in mutual funds. 

1) For tax purposes, a mutual fund scheme that invests 65 per cent or more of its portfolio in equities or equity-related instruments, is considered equity funds. If a balanced fund invests minimum 65 per cent in equities, it is considered an equity fund for tax purpose.

2) Any gain for equity mutual fund units (SIP or lumpsum) held for more than 12 months is considered as a long-term capital gain. There is no tax on long-term capital gains from equity funds. For periods less than 12 months, short-term capital gains tax is applicable at 15 per cent on the gains from equity funds.

3) Many investors opt for dividend option while investing in equity mutual funds. Dividend income from equity mutual funds is tax-free, irrespective of when you receive it.

4) Investments in debt funds (which include liquid funds, income funds, gilt funds etc) are considered long term only if they are held for more than three years. Currently, the long-term capital gain on debt funds is taxed at the rate of 20 per cent. However, investors get the benefit of indexation on their original debt fund investment. This means that the original investment is adjusted for the price of inflation and taxed accordingly. Since the original cost of investment goes up after factoring in inflation, long term capital gains tax comes to negligible levels.

5) But if debt mutual fund investments are redeemed or sold before three years, the short-term gains are taxed according to your tax slab. Income from debt funds also come in the form of dividends. Any dividend declared by a debt mutual fund is exempt from tax in the hands of investors. However, mutual fund houses pay dividend distribution tax @rate of 28.84 per cent (including surcharge and cess) before handing out the dividends to investors.
 

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