A mutual fund investment is a great tax-saving option. In fact, investment in mutual funds has grown in the past few years. Here is a guide to help you understand how mutual funds can help save tax.

Mutual Funds

Mutual funds are a type of investment instrument. Professionals manage funds collected from many investors. They invest in securities like bonds, stocks, and so on.

How tax exemptions on mutual funds can help you

Your investment in mutual funds is exempt from tax in some cases. These mutual funds are usually equity-linked savings schemes (ELSS). ELSS mutual funds invest more than 65% of their portfolio in equities.

Types of tax-saving mutual funds

There are two categories of mutual funds: growth and dividend. Under the growth type of mutual fund, investors receive a lump sum payment at the end of three years. In the dividend type, investors receive a regular income in the form of dividends. The fund house declares the earnings from time to time. Investors receive dividends even during the lock-in period.

Mutual fund investment and Section 80C of the Income Tax Act

Section 80C of the Income Tax Act refers to investment in mutual funds. Section 80C allows people a tax deduction of Rs 1.5 lakh in a financial year. Other than an investment in mutual fund, deduction for tax under this section includes other investments. These include Public Provident Fund (PPF), home loan repayment, and LIC premiums. The National Savings Certificate also falls under this. This section also applies to tax-savings fixed deposits and pension plans

Tax saving on mutual fund dividends

Investors can choose the dividend option when investing in ELSS mutual funds. The dividends they get are completely tax-free.

Tax-saving mutual funds and long-term capital gains

ELSS mutual fund schemes have a lock-in period of three years. Any profit earned on your mutual fund investment held for over one year is a long-term capital gain. Long-term capital gains earned from mutual funds are exempt from tax.

Other benefits of investing in tax-saving mutual funds

  • ELSS mutual funds have the capacity to deliver high returns on investment.
  • Do not have thorough knowledge and understanding of the markets? You do not have to worry. Mutual funds have fund managers.
  • There is no limit on the amount you can invest in a mutual fund.
  • You can invest as little as Rs 500 in a mutual fund via a systematic investment plan (SIP).
  • Mutual funds have one of the lowest lock-in periods of three years.
  • You can continue investing in your mutual fund even after the initial lock-in period.
  • ELSS mutual funds are quite diversified. Even if you are risk-averse, you can still invest in them with little worry.
  • You have three risk options to choose from with mutual funds. You can choose according to your risk appetite. The three options are high risk, medium risk, and low risk.
  • Fund managers take care of mutual funds. Thus, your investment is a more active investment.
  • ELSS mutual funds are open-ended. You can buy and sell them anytime.
  • Mutual funds make a great investment especially if you choose to invest in them via an SIP. It also encourages a regular savings habit.
  • You can use your mutual fund investment to plan for any future expenses.

How can you invest in mutual funds?

You can invest in a mutual fund through a broker or even through your bank. Or you could apply online on the mutual funds’ website. Investment in mutual fund online will save you brokerage charges. But, before applying on the mutual funds’ website, you will have to register your KYC.

Summing up

An investment in mutual funds is a great way to save money and tax. In some cases, your investment in mutual funds is exempt from tax. But before you invest, do your research on the best mutual funds to invest in. Investment in mutual funds online saves money, time, and energy. A mutual fund investment is also low-risk and it generates high returns. All this makes it the perfect investment vehicle.

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