Mutual funds are easily one of the best ways to invest in the stock market. They not only offer inherent diversification by investing in a basket of different companies, they’re also quite well known to produce returns that outperform traditional investment options.
That said, did you know that you can also save tax by investing in a mutual fund? Yes, you read that right. Sounds impossible, right? But it is true. Mutual funds can help you save on tax. Continue reading to find out more.
A special category of mutual funds known as Equity Linked Savings Scheme (ELSS) allow you to save tax by simply investing in them. Here’s some more information regarding this mutual fund product.
Equity Linked Savings Scheme is an open-ended mutual fund that invests in the stocks of various companies. Sounds similar to a regular equity mutual fund right? What sets ELSS apart is that it comes with a lock-in period of three years.
So, to put it simply, if you wish to save tax by investing in mutual funds, you would have to invest in an ELSS, where your investment would remain locked in for a period of three years.
According to section 80C of the Income Tax Act, 1961, by investing in an Equity Linked Savings Scheme, you get to claim the investments that you make in the fund in a financial year as deductions from your total income for that year.
For instance, if you’ve invested Rs. 1 lakh in an ELSS during the 2021-2022 financial year, you can deduct the amount of Rs. 1 lakh from your total income for that year.
The section further states that the maximum amount that you can claim as deductions in a year is around Rs. 1.5 lakhs.
The tax benefits of investing in an ELSS don’t just stop there though. The profits that you gain at the end of the maturity of the Equity Linked Savings Scheme are categorized as Long Term Capital Gains (LTCG). And LTCG is taxed at a flat rate of 10%.
However, according to the Income Tax Act, 1961, Long Term Capital Gains above Rs. 1 lakh in a year are only liable for being taxed. So, if your LTCG is less than Rs. 1 lakh, then you will not have to pay any tax at all. And even if it is above Rs. 1 lakh, you will only have to pay tax on the amount in excess of Rs. 1 lakh.
As you can clearly see, investing in mutual funds, especially ELSS, can help you save on tax. So, what’re you waiting for? Pick an ELSS fund of your choice and start investing right away!
However, to invest in mutual funds, you would mandatorily require to have a demat account. If you don’t possess one, you can simply open a demat account online for free within minutes by getting in touch with Motilal Oswal.
Related Articles: Investing in Mutual Funds is Now Easy with MO Investor App | Invest In Mutual Funds Online In 5 Simple Steps | How to Analyse Mutual Funds for Big Returns | Tax Benefits of Investing in Mutual Funds | Mutual Fund - Need of Financial Plan | Upcoming IPO | LIC IPO