The aim of any smart tax saving investment should be to beat inflation and give a reasonable return at a certain date in the future when the investment is to be encashed. The longer the term for which the deposit is locked out of your reach the greater should be the expected return on investment. That is why Savings Bank account interest rates are lower than others. You can withdraw cash from this account at any time (possibly subject to a minimum balance in the account) without having to worry about sudden reduction in rates.
A Mutual Fund is one such instrument which requires a small deposit but allows you to gain a foothold in the lucrative securities market.
A Mutual Fund is a pool of deposits by a large number of shareholders to form a single corpus which can then be invested in various financial market instruments such as stocks, bonds, G-secs and other assets. The worth of a particular Mutual Fund can be measured by its Market Capitalization.
The M-cap of a fund is the market value of all the assets that make up the fund’s portfolio. Mutual Funds are managed by financial experts who choose which assets are worth investing in. They are still subject to market risks and speculation may not always be to the benefit of the small investor. So, we recommend care and diligence when selecting the proper fund.
Nevertheless there are several unique tax benefits associated with investing in Mutual Funds. These are listed below:
Salient Points and Tax Saving Features of MFs
Section 80C of the Income Tax Act, 1961, allows various investments which qualify for income tax exemption such as Insurance schemes, PPF, EPF and National Savings Certificates. These schemes have a lock-in period of 5 years ordinarily.
An Equity Linked Savings Scheme is a type of Mutual Fund that has at least 65% of the funds invested in equity instruments but with a lock-in period of only 3 years.
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Tax Saving Limit on Investments under 80C
You qualify for income tax deductions to the tune of Rupees 1.5 lakh in one assessment year for the aggregate of all investments made under Section 80C. This deduction stands for the year in which the investment is made. Dividends which get disbursed from a Mutual Fund periodically would also qualify as tax exempt income (Section 10(35)).
Note that, according to Section 10(34) any dividend received from an Indian Company is tax exempt so long as the income generated through this avenue remains less than Rupees 10 lakh in a financial year. Dividend Distribution taxes levied on the company will now compensate for this loss of revenue to the exchequer.
A Note of Caution
Considering that forms of investment other than ELSS offer returns at rates of under 10%, the former is a great way to make significant returns on your savings without incurring the risks associated with unschooled trading in securities. Remember that securities trading is a zero sum game. If you make money today it is always at the expense of someone else.
What are SIPs?
Further, if you do wish to invest in an ELSS fund, do it through a Systematic Investment Plan (SIP), as experts will tell you. You can make a series of monthly deposits instead of a large initial expense and still enjoy the benefits of economies of scale within the equity market.
There are also Debt Mutual Funds which invest a major portion of their portfolio in fixed-income-investments such as bonds.
Capital Gains Tax Benefits on MFs
The last important thing to note about tax savings on Mutual Funds is that if these funds are sold at their Net Asset Value (NAV), a daily fluctuating parameter, within a year of acquiring that fund, short term capital gains tax at the rate of 15% will be chargeable.
On the other hand, long term capital gains arising out of the sale of an MF held for longer than a year will accrue no tax at all.
You can gain the maximum savings on your income by taking assistance from professional experts at AllindiaITR, one of the leading income tax return specialists in the market. AllindiaITR is owned and run by Corwhite Solutions Private Limited.