What are the Tax Benefits of Investing in Mutual Funds?
Investing in mutual funds has been increasingly popular in recent years. These trading solutions allow people to invest in a variety of financial instruments by leveraging the expertise of experienced investment companies. A mutual fund is a type of financial instrument in which several individuals invest their money across a variety of asset types, including stock, debt, gold, and so on.
Types of Mutual Funds
Here is the list of mutual funds.
Equity Mutual Funds
The majority of the assets in equity mutual funds are invested in equities. These funds are divided into groups depending on the market capitalization of the securities they hold.
Debt Mutual Funds
Debt mutual funds make money by lending money to businesses and buying debt papers from the government. These funds are divided into several categories based on the length of time they have been lent and the credit grade of the documents.
Hybrid Mutual Funds
Hybrid mutual funds invest in a multitude of asset types, such as stocks, bonds, and gold. These funds are divided into many types based on how much money they distribute to various asset classes.
Tax saving Mutual Funds
Tax saving mutual funds are similar to other mutual funds, but with the extra income tax benefits. The tax-saving mutual funds have a unique characteristic in that the investments made in them are eligible for tax advantages under section 80C of the Indian Income Tax Act. The majority of tax-advantaged mutual funds are ELSS plans that participate in the economic expansion of financial markets.
Capital Gains Taxation
The capital gains tax rate for mutual funds is determined by the holding period and mutual fund type. The holding period refers to how long an investor kept his or her mutual fund units. The holding period is the duration between the acquisition and selling of mutual fund units in basic terms.
Below is the table showing the duration of each mutual fund.
Type of Mutual Fund
STCG
LTCG
Equity
Less than 1-year
More than 1-year
Debt
Less than 3 years
More than 3 years
Hybrid equity funds
Less than 1-year
More than 1-year
Hybrid debt funds
Less than 3 years
More than 3 years
Income Tax Benefits of Investing in Mutual Funds
Mutual funds provide investors with two types of returns: Dividends and Capital Gains.
Income Tax Benefits offered by Dividends
According to the amendments proposed in the Union Budget 2020, dividends paid by any mutual fund scheme are charged in a conventional manner. Investors' dividends are added to their taxable income and taxed according to their income tax wedge levels.
Equity Funds
10% + 12% surcharge + 4% cess = 11.648%
Debt Funds
25%+ 12% surcharge +4% cess = 29.120%
Income Tax Benefits offered by Capital Grains
Below is the table containing the income tax benefits.
Type of Fund
LTCG
STCG
Equity
Any gain above Rs.1 Lakh = 10% + cess + surcharge
15% + cess + surcharge
Debt
20% + cess + surcharge
Taxed at the investor's marginal tax rate
Hybrid equity funds
Any gain above Rs.1 Lakh = 10% + cess + surcharge
15% + cess + surcharge
Hybrid debt funds
20% + cess + surcharge
Taxed at the investor's marginal tax rate
Section 80C Income Tax Benefits for Mutual Funds
You can deduct investments in Equity Linked Savings Schemes (ELSS) mutual funds from your taxable income under Section 80C of the Income Tax Act, 1961. Under Section 80C, the maximum amount of investment that may be deducted is Rs. 1.5 Lakhs. Investors in the highest tax bracket (30%) can save up to Rs. 46,350 in taxes by investing in ELSS mutual funds. The entire 80C limit is Rs. 1.5 Lakhs, which covers everything that qualifies, such as EPF, PPF, life insurance premiums, NSC and ELSS mutual funds, and so on.
Concluding Comments
Mutual funds are a great platform for investment and earning profit. Long term capital assets provide more profit than short-term capital assets. However, before investing do careful research and choose accordingly.
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