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
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.
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.
How do I know if my mutual fund is tax-saving? ›
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.
What are the tax benefits of mutual fund SIP? ›
SIPs can be one of the best tax-saving instruments with high returns on your investments. You can claim a deduction of up to Rs. 1.5 lakh from your taxable income for investing in ELSS through SIPs under Section 80(C) of The Income Tax Act, 1961. With the highest tax slab of 30%, you can save up to Rs.
Which mutual fund is best for tax saver? ›
List of Top Tax Saving Mutual Funds in India sorted by ET Money Ranking
- Parag Parikh ELSS Tax Saver Fund. ...
- PGIM India ELSS Tax Saver Fund. ...
- HDFC ELSS Tax Saver Fund. ...
- Mahindra Manulife ELSS Tax Saver Fund. ...
- Bank of India ELSS Tax Saver Fund. ...
- SBI Long Term Equity Fund. ...
- Kotak ELSS Tax Saver Fund. ...
- Canara Robeco ELSS Tax Saver.
Index mutual funds & ETFs
Index funds—whether mutual funds or ETFs (exchange-traded funds)—are naturally tax-efficient for a couple of reasons: Because index funds simply replicate the holdings of an index, they don't trade in and out of securities as often as an active fund would.
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.
How do I withdraw money from mutual funds to avoid tax? ›
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 do I report mutual funds on my tax return? ›
Report the amount shown in box 2a of Form 1099-DIV on line 13 of Schedule D (Form 1040), Capital Gains and Losses. If you have no requirement to use Schedule D (Form 1040), report this amount on line 7 of Form 1040, U.S. Individual Tax Return or Form 1040-SR, U.S. Tax Return for Seniors and check the box.
How much tax will I pay on my mutual fund? ›
Taxes on Mutual Fund Long-Term Capital Gains – Tax Year 2021 (filed in 2022)
| Status of Filer | Single | Married, Filing Separately |
|---|
| 0% | $0 to $40,400 | $0 to $40,400 |
| 15% | $40,401 to $445,850 | $40,401 to $250,800 |
| 20% | $445,851 and higher | $250,801 and higher |
Mar 14, 2022
Important Documents required as Investment Proofs
ELSS Mutual Fund: Copy of the investment certificate. Public Provident Fund: Stamped deposit receipt or passbook mentioning the PPF account. Life Insurance Policy: Premiums paid towards life insurance.
Where do I show mutual fund income on my tax return? ›
Capital Gains: In ITR-2 or ITR-3, under the section "Schedule CG," you need to provide details of the sale of mutual fund units, including the purchase price, sale price, and period of holding. The form will automatically calculate the capital gains tax liability based on the provided information.
How much mutual fund is tax free? ›
Tax-saving mutual funds are funds whose investment qualifies for tax exemption under Section 80C of the Income Tax Act, 1961. These funds are called Equity Linked Savings Schemes (ELSS). The exemption limit per annum is INR 1,50,000.
Does a mutual fund provide income tax advantages? ›
Mutual funds in retirement and college savings accounts
Certain accounts, such as individual retirement and college savings accounts, are tax-advantaged. If you have mutual funds in these types of accounts, you pay taxes only when earnings or pre-tax contributions are withdrawn.
Can I show SIP in income tax? ›
With Systematic Investment Plan (SIP), you can save on your taxes and also get higher returns on your investment. Under Section 80(C) of the Income Tax Act, 1961, investing in Equity Linked Savings Scheme (ELSS) through SIP enables you to claim a deduction of Rs 1.5 lakh from your taxable income.
What is the 3 year lock-in mutual fund? ›
What is the 3-year lock-in period? The 3-year lock-in period applies specifically to Equity Linked Saving Schemes (ELSS) - a type of tax-saving mutual fund. It restricts redeeming your investment within the first 3 years from purchase.
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.
Is it better to invest in a tax free or a taxable mutual fund? ›
Taxable funds generally have higher returns—nominally. But if the tax on those returns effectively wipes out the additional return, the more optimal choice is the tax-free fund.
