A mutual fund is a professionally managed open-end investment vehicle that combines money from several participants to buy securities, bonds, money market instruments, and other financial assets.
Mutual Fund Investment Plans are categorized into two major types:
- Equity Mutual Funds
- Debt Mutual Funds
The prime difference between these two is that debt mutual funds invest a major portion of money into fixed income earnings such as RBI bonds, government bonds, and highly rated securities whereas equity mutual funds invest a major portion into the stock markets.
Section 80C Benefit of Investing in Mutual Funds
Section 80C of the Income Tax Act of 1961 allows you to deduct investments in Equity Linked Savings Schemes (ELSS) mutual funds from your taxable income. The maximum amount of investment that may be deducted under Section 80C is Rs 1.5 lakhs.
By investing in ELSS mutual funds, investors in the highest tax band (30%) can save up to Rs 46,350 in taxes (Rs 1.5 lakhs x 30.9 percent tax + cess). Investors should be aware that the total 80C maximum is Rs 1.5 lakhs, which includes all qualifying things such as employee provident fund (EPF) contributions (deducted by your employer), PPF, life insurance premiums, NSC and ELSS mutual funds, and so on. These are called tax saving mutual funds.
Lock-In Period of Equity Mutual Funds
Equity mutual funds with a 3-year lock-in term that can be claimed as a deduction under Section 80C have a 3-year lock-in period. To put it another way, these mutual funds cannot be sold until three years have passed.
Tax-saving instruments like PPF accounts or tax-saving fixed deposits have a lock-in period of 5 years when compared to equity mutual funds that have lower lock-in periods.
Exemption of Tax on Dividend Paid on Mutual Funds
The dividends received by the investors are tax-free. Investors do not have to pay any tax on the dividends received from such a mutual fund. The amount of tax exemption that can be claimed on dividends received from mutual funds has no maximum limit.
Dividends from both Indian companies and mutual funds were previously tax-free, but beginning with the Financial Year 2016-17, a maximum cap on dividends received from Indian companies has been imposed. Dividends received from Indian companies are now tax-exempt up to Rs 10 lakh, but dividends received from mutual funds are still tax-free with no upper limit.
Capital Gain Tax when selling of Mutual Funds
The NAV (Net Asset Value) of a mutual fund represents its worth. The NAV fluctuates daily depending on the mutual fund’s performance. A mutual fund is always bought and sold at the current NAV.
Long Term Capital Gains and Short Term Capital Gains are the two types of gains that arise from the selling of a mutual fund.
| Mutual Fund | Short-term capital gains | Long-term capital gains |
| Equity Funds | 15% + cess + surcharge | No tax if gains are below Rs 1 lakh per year.
The gains generated above Rs 1 lakh are taxed at 10% + cess + surcharge |
| Debt Funds | Taxed based on investor’s income tax slab rate | 20% + cess + surcharge |
Taxation of Capital Gains when Invested through Systematic Investment Plan (SIP)
Systematic Investment Plans (SIPs) are a type of mutual fund investment. They are created in such a way that investors can invest a small amount in a mutual fund scheme regularly. Investors have the option of selecting the frequency of their investments. Weekly, monthly, quarterly, bi-annually, or yearly are all possibilities.
You don’t have to pay any tax if your long-term (more than a year) capital gains are less than Rs 1 lakh. From the second month onwards, short-term capital gains on units bought through SIPs. Regardless of your income tax bracket, these profits are taxed at a flat rate of 15%. On top of that, you’ll have to pay the relevant cess and surcharge.
Conclusion
Investing in mutual funds has various advantages and tax benefits are one of them. However, don’t invest in any mutual fund for the sake of tax benefits. Consider doing proper research and select a mutual fund that is suitable for you. You can explore various mutual funds on Kotak Mahindra Bank website.
