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Tax Benefits from investing in Mutual Funds

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Investments in Equity Linked Savings Schemes or ELSS mutual funds allow for  a deduction from taxable income under Section 80C of the Income Tax Act 1961. The maximum investment amount for tax deduction is Rs 1.50 lakhs.

Can I save tax by investing in mutual funds?

Mutual funds having  a tax scheme or Equity Linked Savings Scheme (ELSS), are great tax-saving. From this tax savings you can claim deductions from your taxable income if you put your money into these ELSS  investments.

How are mutual fund investments taxed?

Generally yes taxes must be paid on mutual fund earnings, in two forms,

Dividends received from the mutual Funds  are added to your total income and taxed as per your tax rate; if the gains are realized on sale of your mutual funds, then such gains are taxed as capital gains. 

 Do all mutual funds give tax benefits?

Only investments in equity linked saving schemes or ELSS funds qualify for tax deduction under section 80C. Investors can claim tax deduction of up to Rs 1.50 lakh under Section 80C of the Income Tax Act. All ELSS funds are eligible for the tax deduction under Section 80C.

Is SIP tax free?

If you are investing through SIPs in equity and balanced mutual fund schemes, then all the gains are after one year will be treated as long term capital gains and will suffer 10 % long term capital gains tax. However, if your SIPs were in debts funds or hybrid funds (MIPs) then the profits will be tax @20% after indexation.

Indicative performance of  Tax Savings Funds or ELSS funds : ( as on 30th March 2021) 

S.No

Scheme Name

1 YR CAGR

3 YR CAGR

5 YR CAGR

1

Nippon India Tax Saver Fund

24.88%

-1.00%

10.51%

2

Mirae Asset Tax Saver Fund

93%

17.60%

21.40%

3

AXIS Long Term Equity Fund

23.43%

13.67%

17.37%

4

DSP Black Rock Tax Saver Fund

32.67%

12.99%

19.61%

 

Conclusion :

  1. Save ₹46,800 in Taxes with Tax Saving Funds ( assumed for 30% tax investors) 
  2. Average returns around 15% in last 3 years, better than Fixed Deposit or PPF
  3. Has a lock in period of 3 years only ( lowest lock in among all tax saving investments) 
  4. Invest upto Rs 1,50,000 under  Section 80C

By : Sangeetha , Sherpani, Finsherpa Investment Services 

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