investing in mutual funds, types of investment, elss tax saving mutual funds, mutual funds, mutual fund investment, deduction under section 80c, types of mutual funds, tax saving mutual fun
The beginning of a new financial year brings out the perfect time to start new, good investment habits. It’s the perfect time to have your investments planned along with the taxation factor. One good investment option is to consider mutual funds for your investment portfolio. This article will focus on how mutual funds can help you in your tax planning practice. But before we get to that, let’s quickly what mutual funds are.
What is a mutual fund?
A mutual fund is an investment vehicle offered by AMCs (asset management company) and fund houses to investors. It is a pool of money of money collected by various investors which is further invested in different securities and asset classes according to the fund’s objective. Mutual funds are professionally managed by fund managers who have the necessary knowledge, expertise, and skillset to invest in the markets. An investor can choose to invest in stocks, bonds, money market instruments, cash and cash equivalents, etc.
Tax saving mutual funds
ELSS, short for Equity-Linked Saving Scheme are equity oriented mutual funds that allocate a majority of their assets towards equity and equity-related securities. These tax saver mutual funds are open-ended funds that not only help in achieving significant returns over time but also help in saving tax. ELSS funds are one of the Section 80C investments that offer a tax deduction of up to Rs 1.5 lac per annum under section 80C of the Income Tax Act, 1961. An investor can save up to Rs 46,800 by investing in these tax-saving mutual funds. ELSS tax saving mutual funds thus provide dual benefits of tax-saving and capital appreciation opportunities to investors. Note that ELSS funds have a lock-in duration of three years.
Just like any other type of mutual funds, you can invest in ELSS either through a systematic approach – SIP (Systematic Investment Plan) or lumpsum mode of investment. If you invest in ELSS through lumpsum then you can withdraw your money after three years. However, if you invest in ELSS via SIP, then each SIP installment must complete a period of three years. In short, each SIP installment acts as a new ELSS investment.
For instance, Rajesh decides to allocate Rs 5000 in ELSS mutual funds on 3rd of every month. He starts investing Rs 5000 in ELSS funds from 3rd March 2018. On 3rd March 2021, only the first installment would have completed three years and would be eligible for withdrawals. Similarly, on 3rd April 2021, the second installment would have completed three years and so on.
Post the lock-in tenure, you can withdraw your investments from ELSS funds. As ELSS funds have a lock-in period of three years, they attract long-term capital gains (LTCG) on withdrawal. LTCG of up to Rs 1 lac are exempt from any tax. LTCG above Rs 1 lac attract an interest rate at 10% p.a. without the benefit of indexation.
What makes ELSS mutual funds stand from other tax-saving investments is the fact that the gains earned of ELSS investments are only taxed on redemption. Basically, there is no tax on notional gains. On the other hand, taxes on tax-saving fixed-deposits (FD) are levied on interest accrued by these investment options.
So, what are you waiting for? Begin with your tax-planning activities early this year so that you do not end up making any knee-jerk investment decisions at the last moment. Your mutual fund investments must align with your investment horizon, risk appetite, and financial goals. Happy investing!