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Mutual Fund Mondays: Tax Benefits

Prajjwal Kaushik 
on 10 September 2018

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After learning all that we have about Mutual Funds, we move our discussion forward to the most important consideration that investors have on their minds while making investments in mutual funds- that is the tax implications surrounding mutual funds.

Mutual funds, like any other investments, attract a tax on the income generated as capital gains based on their period of holdings. Now, make no mistake there are tax exempt mutual funds too. But not all mutual funds are exempted from tax. Only municipal or government bonds are tax exempted.

But, here in this article, we will not be discussing what are the tax implications of mutual funds. However, we will be discussing what are some tax benefits of investing your savings in mutual funds.

Deduction under section 80C: ELSS Mutual Funds

Section 80C deduction isn’t new to an active investor or a taxpayer. In fact, every person is aware of the deductions under 80C. Mutual fund investments allow a deduction of upto Rs.1.5 lakhs under the section in any fiscal year. Equity-oriented mutual funds are the ones that can save an investor a lot if taxes.

What are equity oriented mutual funds?

Equity-oriented mutual funds where a major chunk of the total asset pool is invested into equity instruments. In exact terms, it means more than 65% of the total asset pool. Another name for such schemes would be Equity Linked Saving Schemes (ELSS).

Get Locked in with the Lock-in Periods:

All the ELSS funds/tax saving mutual funds have a lock-in period of 3 years. In other words, it means that we cannot sell them before the expiry of three years. But generally, it is advised to have an Investment Horizon of at least 5 years to overcome the negative effect of volatility.

However, if compared to other tax saving options like FD and PPF, 3 years seems to be a reasonable amount of time to invest your savings and save some tax on the other hand.

Each and every major mutual fund house have their own set of Tax saving mutual funds with different names.

No Tax on Dividend received from Mutual Funds

If you have selected a dividend plan in your mutual funds, then you must be receiving dividends on those investments. The dividends received by investors on their investments is completely exempt from tax in their hands. No tax has to be paid on the dividend income earned on the investments.

Capital Gains Tax on returns from Mutual Funds

Mutual Funds are subject to capital gains based on the increase/decrease in their value over the period of time. If there’s an increase in the value of the NAV of Funds, in such cases capital gains will be there and the same will be subject to tax based on its period of holding.

However, where the capital gains are long-term and are less than 1,00,000 rupees, in such cases no capital gain tax is applicable on returns from Mutual Funds.

In case of mutual funds, the tenure of 1 year will be determining the factor to call an investment long-term or otherwise.

I hope you all found the article interesting, in the coming weeks, we will be writing more on mutual funds. Please share your comments down below.


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