Mutual funds and their tax benefits

Mutual funds and their tax benefits

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Mutual funds and their tax benefits

A Mutual Fund is a fund that is put up by collecting funds from the public — known as shareholders — and is professionally managed by investors who invest the money in securities. It has turned out to be one of the most popular modes of investment as it is much accessible, well-regulated, and carries comparatively lower risk with it.

Mutual funds are broadly categorized into two types — debt and equity mutual funds.

Debt mutual funds are the kind of funds where a major chunk is invested in fixed income earning and debt instruments, whereas equity mutual funds are those where a major chunk of the pooled money is invested in equity shares.

Several provisions are set out to encourage people to invest in mutual funds, and one of them is the tax-saving benefits. The tax that can be claimed on mutual funds in India is one of the reasons why they are an accessible mode of investment.

Here are some of the tax-saving benefits that the government offers to people who choose to invest in mutual funds.

 

1. Tax benefit of investing in equity mutual funds under Section 80C

 

Equity mutual funds are those funds where a significant part of the pooled amount is invested in the stock market or equity market. Along with that, you have the option to purchase these funds through an Initial Public Offering (IPO) or the stock market.

The amount of money that you invest in equity mutual funds can be claimed for deduction under Section 80C. The maximum amount that you can claim as a deduction under Section 80C is Rs 1,50,000, although there is no upper limit for investing in these funds.

The deduction amounting to Rs 1,50,000 is the total deduction that can be claimed for a particular financial year through several financial instruments, such as pension plans, life insurance policies, national savings certificate, PPF account, tax-saving fixed deposits, and repayment of the principal amount on your home loan.

 

2. Tax exemption on dividends

 

One of the features of a mutual fund plan is that it regularly pays out dividends to the people who invest in it. The dividend which is received here is tax-free, which means that the money that you make on your investments is yours, and no tax is applied to it.

If you are wondering whether there is a maximum limit on the amount of exemption, then there’s some good news coming — there is no limit, whatsoever, on the measure of dividends that you receive.

 

3. Lock-in period for equity mutual funds

 

One of the best features for any investment could be its liquidity – the ability to access your funds at will, to convert it into real cash. The liquidity option makes investments attractive. Mutual funds often come with a minimum lock-in period, which means that you do not have to wait for years, or decades in some cases to access your funds.

There is a lock-in period of 3 years, which is applied to equity mutual funds for deductions under Section 80C of the Income Tax Act. The lock-in period for these mutual funds is significantly lesser when you compare it to those of other financial instruments — 5 years in case of other tax saving instruments such as National Savings Certificate, fixed deposit account, and Public Provident Fund (PPF) account.

 

4. Capital gains on selling mutual funds

 

The Net Asset Value (NAV) denotes the value of any mutual fund. This value keeps on changing regularly and is highly based on the performance of the mutual funds, of how the assets of the company have been standing against its liabilities. A mutual fund is sold and purchased at its net asset value.

When you sell a mutual fund, the gain on it is divided into two parts — short term capital gains and long term capital gains.

If you have held an equity fund for a period which extends for less than one year, then your gains on the sale of the mutual fund will be taxed at 15 percent under Section 111A. There is no maximum cap on this.

On the other hand, if you have held an equity fund for a period longer than one year, the gains on it are fully exempted from any tax. Also, there happens to be no upper cap on the amount which you can claim for exemption after the sale of any mutual fund.

This is one of the reasons why it is recommended to hold on to a mutual fund for a longer period. It has direct implications on whether your gains on the sale of the fund will be taxed or not.

 

Other benefits of investing in mutual funds

 

Besides the fact that you will be saving quite a bit of money with the tax benefits, there are several other reasons why you should consider investing in mutual funds.

Mutual funds are professionally managed by fund managers who always have a keen eye on the market and can make clear distinctions between which funds are performing well and which are not. This comes as a great relief for those who do not really have many ideas about mutual funds, or how to go about managing their investment portfolio.

Mutual funds on Finserv MARKETS have opened up new doors to how the whole process of investment is looked at. There is a zero percent commission on your returns, which means that the money that your funds will make will not carry any commission on it. With Finserv MARKETS, opening an account is a fast and hassle-free process, and can be done online on a smartphone or a computer in a few clicks after providing your basic KYC documents. You also get a thorough insight into your investment portfolio so that you know how your investments are performing in the market. Besides, you also get access to a host of exclusive offers, specially catered for you, based on your risk portfolio, existing funds, and your investment goals.

 

Finserv Markets, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment, and an exclusive EMI store, all under one roof – anytime, anywhere! 

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