Mutual funds, also known as Equity Linked Savings Scheme (ELSS), are great tax-saving instruments under Section 80C of the Income Tax Act, 1961. This section allows you to claim benefits from your taxable income if you put your money into certain investments.
What is ELSS?
ELSS is an equity diversified fund which is linked to the equity market. It is a mutual fund scheme that invests your money into equity and equity-related securities.
Features
ELSS has a lock-in period of three years so you have to leave the money in these funds for minimum three years. And the longer you retain your investment into these funds the higher the chances of you making money.
Deductibles
You are allowed to invest up to Rs 1.5 lakh in tax-saving funds. You will get a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.
Advantage of ELSS
a. ELSS funds are the only tax-saving funds within the Rs 1.5 lakh limit which has the additional advantage of giving equity-linked returns.
b. Investing into ELSS allows you dual benefits – you get capital appreciation and tax benefits.
c. ELSS has the shortest lock-in period of three years when compared to other tax-saving instruments like PPF and NSC.
d. Since they are equity market linked, ELSS funds can bring in good returns over the long term, especially if retained after the lock-in period is over.
e. Good investment funds for those with moderate to high risk-appetite.
f. Dividends from ELSS funds are tax-free during the investment period.
g. Profits from sale of ELSS fund units are considered long-term capital gains and hence, are tax free.
How to invest
The best way of investing into ELSS funds is through monthly SIPs (systematic investment plan). The minimum investment through a SIP can be as low as Rs 500 per month.
At the start of every year, work out the statutory deductions and calculate what you have left over from the Rs 1.5 lakh limit. Divide this amount by 12 to decide your SIP amount.
FAQs
ELSS or Equity Linked Savings Schemes are Mutual fund investment schemes that help you save income tax. That's why they are also known as tax-saving funds. The Income Tax Act, under section 80c, allows taxpayers to invest up to INR 1.5 lakh in specific securities and claim it as a deduction from their taxable income.
Do mutual funds reduce taxable income? ›
Mutual funds with dividend distributions can bring in extra income, but they are also typically taxed at the higher ordinary income tax rate. In certain cases, qualified dividends and mutual funds with government or municipal bond investments can be taxed at lower rates, or even be tax-free.
Can mutual fund be used for tax saver? ›
Benefits of tax-saving mutual funds
Investments in tax-saving mutual funds like ELSS qualify for tax deduction up to 1.5 lakh per annum under Section 80C of the Income Tax Act. These funds carry one of the shortest lock-in period among all 80C investments.
How to save tax while redeeming mutual funds? ›
Systematic Withdrawal Plan (SWP): Set up an SWP to automatically redeem your mutual fund units regularly. By keeping withdrawals below Rs. 1 lakh per year, you may avoid LTCG tax altogether.
How are mutual funds treated in income tax? ›
An Overview of Taxation on Mutual Funds
The gains are considered short-term and taxed at the investor's applicable Income Tax Rate, if held for less than three years. Gains from units held for more than three years are treated as Long-Term Capital Gains (LTCG).
Can I show mutual fund loss in income tax return? ›
In case you have earned any capital gains or losses during a financial year, you need to report that by filing ITR form 2 or 3 (if you are not eligible to file ITR 2). Gains from mutual funds are taxed only in the financial year when the units are redeemed.
Which mutual funds are most tax-efficient? ›
Top Tax-Efficient Mutual Funds for U.S. Equity Exposure
- Vanguard Total Stock Market Index VTSAX.
- Vanguard 500 Index VFIAX.
- DFA US Core Equity 1 DFEOX.
- iShares S&P 500 Index WFSPX.
An ELSS is a mutual fund class that offers tax deductions under Section 80C of the Income Tax Act, 1961. To check if a fund is an ELSS or not, you need to check for its details on the fund house's website. If you are investing via a third party, the same information will also be available on their website.
Are mutual fund expenses tax deductible? ›
While these fees may be directly tax deductible on line 22100 of your tax return, the fees paid for a mutual fund are indirectly tax deductible. This is because mutual funds flow through their net income to the fund's unit holders.
Which is the best tax-saving scheme? ›
Contents
- Tax-saving investment options and plans under Section 80C:
- ELSS (Equity-Linked Saving Scheme) Mutual Fund.
- National Pension Scheme (NPS)
- Unit Linked Insurance Plan (ULIP)
- Public Provident Fund (PPF)
- Sukanya Samriddhi Yojana (SSY)
- National Savings Certificate (NSC)
- Senior Citizen Saving Scheme.
If you receive a distribution from a fund that results from the sale of a security the fund held for only six months, that distribution is taxed at your ordinary-income tax rate. If the fund held the security for several years, however, then those funds are subject to the capital gains tax instead.
Should I redeem my mutual funds? ›
Reaching financial goal
If you've achieved your goal a little sooner, you should consider redeeming your investment. If your estimated holding period has ended and you haven't reached your goal, it's time to pull up a SIP calculator to see how many more monthly contributions you'll need to make to achieve your target.
Should I reinvest capital gains from mutual funds? ›
Capital gains generated by funds held in a taxable account will result in taxable capital gains, even if you reinvest your capital gains back into the fund. Thus, it may be smart not to reinvest the capital gains in a taxable account so that you have the cash to pay the taxes due.
Do I claim mutual funds on income tax? ›
The funds report distributions to shareholders on IRS Form 1099-DIV after the end of each calendar year. For any time during the year you bought or sold shares in a mutual fund, you must report the transaction on your tax return and pay tax on any gains and dividends.
Are mutual funds eligible for tax deduction? ›
Mutual funds are not tax-free except for ELSS (equity-linked savings schemes or tax-saving funds) and some retirement funds. As per the Income Tax Act, under Section 80C, you can claim a deduction of up to Rs. 1.5 lakh for investments made in ELSS and can save taxes up to Rs.
How do you show mutual funds in income tax? ›
The long-term capital gains from equity-oriented mutual funds need to be reported in 'Schedule 112A'. If you have short-term capital gains, that needs to be reported in Schedule CG.
Do investments lower taxable income? ›
Pre-tax investment accounts, such as traditional IRAs, 401(k)s, 403(b)s, 457 plans and certain self-employed IRAs, allow investors to contribute funds before income taxes are applied. This means that contributions reduce your taxable income, potentially lowering your tax bill in the year you contribute.
How do I know if my mutual fund is a tax saver? ›
An ELSS is a mutual fund class that offers tax deductions under Section 80C of the Income Tax Act, 1961. To check if a fund is an ELSS or not, you need to check for its details on the fund house's website. If you are investing via a third party, the same information will also be available on their website.
Are mutual funds taxed twice? ›
Mutual funds are not taxed twice. However, some investors may mistakenly pay taxes twice on some distributions. For example, if a mutual fund reinvests dividends into the fund, an investor still needs to pay taxes on those dividends.
