Financial Awareness Level
Mutual Fund Tax Benefits
Investing in mutual funds not only helps in wealth creation but also offers tax-saving benefits. Certain mutual funds qualify for tax exemptions under the Income Tax Act, helping investors reduce their taxable income under old tax regime. If you’re wondering which mutual funds come under tax-free categories, this guide will explain the key mutual fund tax benefits and how you can maximize savings.
1. Mutual Funds Schemes and Tax Exemptions
Not all mutual funds provide tax benefits, but some schemes allow deductions or tax-free returns under specific sections of the Income Tax Act.
Mutual Funds Schemes That Offer Tax Benefits
- Equity Linked Savings Scheme (ELSS) – Eligible for tax deduction under Section 80C under old tax regime
- Debt Funds & Hybrid Funds – Taxed based on holding period and capital gains.
- Index Funds & ETFs – Not tax-free but taxed as per equity mutual fund rules.
2. Mutual Funds Under Which Tax Sections?
- Section 80C – ELSS funds qualify for a tax deduction of up to ₹1.5 lakh per financial year.
- Section 10(35) – Dividends received from mutual funds were earlier tax-free, but now they are taxed as per the investor’s income slab.
- Capital Gains Taxation – Long-term and short-term capital gains on mutual funds have different tax implications.
3. Are Mutual Funds Tax-Free?
While mutual funds are not entirely tax-free, ELSS funds offer tax deductions, and long-term gains on equity funds up to ₹1.25 lakh are tax-exempt under LTCG rules.
4. Tax-Free Mutual Funds: ELSS Benefits
- Lock-in period of 3 years (shortest among tax-saving investments).
- Potentially higher returns compared to traditional tax-saving instruments.
- No upper limit for investment, but only ₹1.5 lakh is eligible for tax deduction.
Conclusion
Understanding mutual fund tax exemptions can help you plan your investments better. If you’re looking for a mutual fund tax benefit, ELSS funds under Section 80C provide the best option. However, it's essential to assess your financial goals and tax planning needs before investing in any mutual fund.
For complete details click here
Association of Mutual Funds in India
tax reckoner 2024-25 edit 082024 [a3].cdr
Disclaimer:
The information is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
FAQ Section
Which mutual funds schemes offer tax benefits?
The main tax-saving mutual fund is the Equity Linked Savings Scheme (ELSS), which qualifies for deductions under Section 80C of the Income Tax Act.
How much tax deduction can I claim with ELSS funds?
You can claim up to ₹1.5 lakh per financial year under Section 80C under old tax regime, reducing your taxable income.
What is the lock-in period for ELSS funds?
ELSS funds have a mandatory lock-in period of 3 years, the shortest among tax-saving investment options.
Are all mutual funds schemes tax-free?
No, mutual funds schemes are not entirely tax-free. While ELSS funds provide tax deductions, other mutual funds schemes are subject to capital gains tax based on the holding period.
How are capital gains from mutual funds schemes taxed?
- Equity Schemes :
- Short-Term Capital Gains (STCG) (holding period < 1 year) – Taxed at 15%.
- Long-Term Capital Gains (LTCG) (holding period > 1 year) – Tax-free up to ₹1.25 lakh, beyond which 10% tax applies.
- Debt & Hybrid Funds:
- Short-Term Gains (holding period < 3 years) – Taxed as per your income tax slab.
- Long-Term Gains (holding period > 3 years) – Taxed at 20% with indexation benefits.
Are dividends from mutual funds taxable?
Yes, dividends are now taxed as per your income tax slab under Section 10(35). Earlier, dividends were tax-free, but this changed after the 2020 tax reforms.
Can I invest more than ₹1.5 lakh in ELSS funds?
Yes, there is no upper limit on ELSS investments, but only ₹1.5 lakh qualifies for tax deductions under Section 80C.
Do index funds and ETFs provide tax benefits?
No, index funds and ETFs do not qualify for tax deductions but are taxed similarly to equity mutual funds based on holding period.
What happens if I redeem my ELSS investment before 3 years?
You cannot withdraw ELSS funds before 3 years, as it has a mandatory lock-in period.
How can I maximize tax savings with mutual funds?
To maximize tax benefits:
- Invest in ELSS funds to claim Section 80C deductions.
- Hold equity mutual funds for more than 1 year to minimize capital gains tax.
- Choose debt mutual funds for over 3 years to benefit from indexation and lower tax rates.
Did you find this article Interesting?
1
2
3
4
5
Recommended For You
Beginner
Different Types of Mutual Fund Schemes In India
5 min read
Intermediate
Risk Management through Mutual Funds
5 min read
Intermediate
Direct Equity Investing vs. Investing in Mutual Funds
5 min read
Disclaimer
An Investor Education And Awareness Initiative Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. if they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.sebi.gov.in/scores-home/. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.
