While there exist numerous ways to increase your savings, mutual funds are among the top options that offer quality returns. Yet, the associated taxes compromise the long-awaited earnings to a significant extent. If you are an investor looking to maximize your returns while minimizing tax liabilities, consider the hunt for a mutual fund scheme with effective tax-saving benefits to be over.
ELSS is an ideal choice for your portfolio. With tax savings benefits and strong growth potential, it comes with long-term wealth-building options. Get a basic idea about the scheme and how it can be a beneficial selection for obtaining tax benefits.
Mutual Fund Taxation
The profits earned on an investment in mutual funds are referred to as ‘Capital gains’. This extra income is taxable. While investors can also apply for tax deductions in a few cases, let’s focus on the taxation methods of mutual funds. It includes:
- Fund types: There are different taxation rules for varying types of mutual funds, such as hybrid, equity, debt, and other mutual funds.
- Dividend: The profit divided among the investors is referred to as a dividend, and it is taxable, too.
- Capital gains: As mentioned, this income is taxable.
- Holding period: The taxation is applicable if the investor holds the investment for an extended time.
Tax Saving Mutual Funds
With such laws applicable, tax-saving mutual funds are the optimum choice. Equity Linked Savings Scheme (ELSS) offers such an opportunity with a tax saving option under Section 80C of the Income Tax Act, 1961. So, let’s understand the scheme in detail for obtaining tax benefits on mutual funds.
Equity Linked Savings Scheme
ELSS involves an investment of funds into equity and equity-related securities. It is an effective tax-benefit option for investors who wish to invest in mutual funds. The ELSS offers tax exemption of up to INR 1,50,000 from the yearly taxable income under Section 80C of the Income Tax Act. This allows savings of up to INR 46,800 of taxes per year.
The scheme comes along with a year lock-in period. It makes the incomes via ELSS a Long-Term Capital Gain (LTCG). The taxation occurs at 10% if the income is above INR 1 lakh.
Features of ELSS Mutual Funds
The ELSS mutual funds are marked by the following features:
- It involves the investment of at least 80% of the total investible corpus in equity and equity-related instruments.
- ELSS is currently the only tax-saving instrument capable of offering inflation-resistant returns.
- There is no maximum investment tenure apart from the shortest three-year lock-in investment period.
- ELSS follows fund diversification by investment across different themes, market capitalisations and sectors.
- Profit is considered as LTCG and taxed accordingly.
- There are tax deductions of up to INR 1.5 lakhs per year under Section 80C of ITA.
How Does ELSS Offer Tax Benefits in Mutual Funds?
Defined by the important feature of a three-year lock-in period, the ELSS-based profits are not taxable as Short-Term Capital Gains (STCG). The gains from ELSS are tax-free for earnings up to INR 1 lakh per year. Further, beyond the stated limit, the investors are taxable at 10% LTCG tax.
Adding to the benefits aspect as specified above, the ELSS also offers tax deduction benefits on the principal amount under section 80C of the Income Tax Act. As per this, the investors can obtain tax deductions of up to INR 1.5 lakhs.
Points to Focus on While Investing in ELSS
If you aim to invest in mutual funds, specifically ELSS, there are certain factors to consider before proceeding with the decision. It includes:
- To deal with market volatility, the investors must have a holding period of over five years when investing in ELSS.
- The returns in the scheme depend on underlying securities. Hence, the returns are not guaranteed.
- Investors can not redeem their investment before the specified lock-in period of three years.
Benefits of Investment in ELSS
Investment in ELSS comes along with two major benefits. These are:
- Dual investment method: To invest in mutual funds, the investors can go with a lump sum method or SIP approach. It allows investors to choose their preferred methods, i.e. invest in small amounts or in total, based on their financial status.
- Low minimum amount: This mutual fund investment can begin with a small amount as INR 500. It allows and welcomes more individuals to leverage the benefit of this tax-saving scheme.
Conclusion
Mutual funds are an effective option to earn amounts capable of beating inflation. However, the associated tax deductions can lead to expenditure of a significant sum. Allowing protection of profits, the Equity Linked Savings Scheme offers a promising opportunity. With tax deduction benefits up to INR 1.5 lakhs, investors can expect both legal tax benefits and wealth generation. Yet, thoroughly understand the scheme before proceeding to invest.
