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
Tax Saver Funds (ELSS Mutual Funds) offer tax deductions under Section 80C, allowing investments up to ₹1.5 lakhs for potential growth. Invest in equities through a mutual fund structure with a 3-year lock-in to encourage long-term investing.
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? ›
Treatment of Capital Loss on Mutual Funds
Income-tax Act allows a person to adjust his losses with taxable profits. Long-term capital loss can be set off only against long-term capital gains, and it cannot be set off against short-term capital gains, though both of them fall under the same head of capital gains.
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.
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.
How do I claim mutual fund losses on my taxes? ›
Generally, 50% (1/2) of your capital gain or capital loss becomes the taxable capital gain or allowable capital loss. Use lines 131 and 132 of Schedule 3, Capital Gains (or Losses), to calculate and report all your capital gains and capital losses from your mutual fund units and shares.
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.
In case of short-term capital gains, you need to report it in Schedule CG of the ITR form. Whereas in case of long-term capital gains exceeding Rs. 1 lakh, you need to report it in Schedule 112A. When specifying the type of capital assets sold by you, choose equity shares or bonds and debentures accordingly.
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.
How to report mutual fund on 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.
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.
