Tax Benefits of Mutual Funds in India
What are Mutual Funds?
These are the funds which collect funds from the public and invest in securities or bonds. These bonds help the investors earn interest.
Classification of Mutual Funds
These funds can be classified into two categories:
- Equity mutual funds- They are those funds where a major part of the funds is invested in equity shares.
- Debt mutual funds- They are the funds where a major part of the funds is invested in debt earning instruments.
The government offers various tax benefits to people who invest in such funds. These benefits are described below:
- Section 80C- Tax benefit of investing in equity mutual funds
Equity funds are the funds where a major part of the funds is invested in equity shares. These are also known as ELSS funds and they purchase the shares through IPO or Stock Markets. The amount invested in these funds can be claimed for deduction under Section 80 C. The maximum amount that can be claimed for deduction is Rs. 1,50,000.
The instruments under which the deduction under Section 80C can be claimed are:
- PPF Account
- Pension Plans
- National Savings Certificate
- Life Insurance Policy
- Repayment of Principal Amount on Home Loan, etc.
- Lock-in period
The lock-in period of equity funds is three years, i.e., the mutual funds can be sold for three years. Other tax-saving instruments like National Savings Certificate, PPF Account, etc have a lock-in period of 5 years.
- Tax Exemption on the dividend paid
The investors regularly receive dividends from the equity mutual funds and these dividends are tax-free, i.e., there is no requirement for payment of tax on these dividends received by the investors on equity mutual funds.
- Tax on Capital Gains on sale of these funds
The value of the mutual fund is determined by its NAV (Net Assets Value). The Net Assets Value of the mutual funds keep changing on a daily basis based on the performance of the mutual funds. A mutual fund is always purchased and sold at its prevailing NAV.
Related Post: Section 80G: Deduction for Donation
The gains after selling the mutual funds are of two types:
- Long-Term Capital Gains- If the fund has been held for more than 1 year, then the sale of such funds raise long-term capital gains. No capital gains tax is levied on such gains. There is no limit on the exemption on the amount which can be claimed for exemption on long-term capital gains.
- Short-Term Capital Gains- If the fund has been held for less than 1 year, then the sale of such funds raise short-term capital gains. The tax on such gains is levied at the rate of 15%. There is no maximum limit on the amount which can be claimed for exemption on short-term capital gains.
For any help on ITR Filing feel free to consult the tax experts at Taxraahi. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business Return, Bulk Return or Revised Return Filing.