How to Avail Maximum Tax Benefits by Choosing the Best Mutual Funds

Mutual funds collect money from different investors and use it to buy securities. While equity mutual funds invest a large amount in equity shares, debt mutual funds invest more in debt instruments. The reason most people choose mutual funds over other investment methods is high security, returns, and tax benefits.

However, doubts about the tax benefits of mutual funds confuse many individuals. There are several tax exemptions that can be availed on mutual funds but most of these have some terms and conditions. Let’s see what are the different tax benefits you can avail and how.

What You Should Know Before Investing?

1.     Category

Knowing the category of your mutual fund will tell you if you can avail tax benefits. This is simple as the fund house usually mentions whether it is a tax-saving scheme or not.

For instance, ELSS or equity-linked savings scheme has tax benefits under Section 80C for up to INR 1.5 lakhs. However, it should be noted that Section 80C includes other instruments such as PPF account and all these instruments can avail total exemption of INR 1.5 lakhs only.

Note: The first-time equity investors get coverage under Rajiv Gandhi Equity Savings Scheme.

2.     Tax Benefits

Check the tax benefits as mentioned in the scheme. Just because you have heard from an acquaintance or friend that a particular scheme offers some tax benefits, you should not refrain from checking it yourself.

Generally, the fund house or the company providing the tax-saving mutual fund provides clear details related to tax benefits.

Tax Benefits That Can Be Availed

1.     Section 80C For Equity Mutual Funds

The ELSS or equity mutual funds invest a large chunk of money in IPO or the stock market. This amount invested by individual mutual fund holder is eligible for tax exemption under Section 80C. While you can invest as much money in mutual funds as you want, the deduction will be only up to INR 1.5 Lakhs.

As already mentioned, this deduction is cumulative for the following instruments:

  • PPF account
  • Life insurance plan
  • Pension plan
  • Fixed deposit (Tax saving)
  • NPS (National Savings Certificate)
  • Home loan repayment
  • Tax saving mutual funds

2.     Exemption on Paid Dividend

The tax saving mutual funds or mutual funds in general pay dividend to the members or investors of the fund. This dividend is tax-free for the investor. Additionally, the good news is there is no exemption limit on the dividend that you will receive on your mutual funds.

3.     Capital Gain’s Exemption

To understand the tax exemption on capital gains, it is important to first understand the importance of NAV, long-term capital gains, and short-term capital gains.

  • The NAV is the net asset value of a fund which keeps changing according to the fund’s performance. Whenever you buy or sell mutual fund units, it is according to the NAV of the corresponding time.
  • If you keep the mutual fund for more than one year, its sale comes under long-term capital gains. The gains you will acquire from this mutual fund will be exempted by tax and there is no maximum limit on this.
  • If you keep the mutual fund for less than a year, its sale comes under short-term capital gains. The capital gains from the sale of this fund will attract a 15% concessional rate.
  • To avail exemption for capital gains, you need to keep the fund for more than one year.

Mutual Funds: Lock-In Period

If you want to avail tax exemption under Section 80C for your tax-saving mutual fund, then you should keep the fund for three years. The lock-in period is mandatory and if you sell the fund before that, you will not receive the tax benefits.

However, the 3-year lock-in is still the least in the category as other Section 80C exemptions have a minimum of a 5-year lock-in period, such as PPF and NPS.

Hence, it is wise to choose your fund carefully. Don’t sell it for 3 years and check other details such as the performance of the fund in the past 5-10 years before purchase. To know more about you mutual funds you can refer to the given link