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Guide to Save Tax through Mutual Funds
A rupee saved is a rupee earned.
And a rupee well invested can grow a lot more.
With a significant amount of your earnings going in taxes, smart tax planning can ensure you keep more of your hard-earned money. With the right knowledge and tax planning, you can invest your money prudently to pay less tax and earn more out of what you save.
Selecting the right tax saving instrument is the key and mutual funds are great instruments to invest in. Here is a guide to help you understand tax implications and issues regarding mutual fund investments. Read on to know how to use mutual fund tax rules to your advantage.
Tax saving Benefits of Mutual Fund Investments
Mutual funds can be tax-efficient investment avenues that can help reduce your tax burden and at the same time increase your wealth.
ELSS – An Ideal Tax-saving Instrument - Equity Linked Savings Schemes (ELSS) offers an easy option to obtain tax benefits and an opportunity to harness the potential upside of investing in the equity market.
What are ELSS Funds?
Ø ELSS funds are diversified equity funds with a lock-in period of 3 years.
Ø Offer tax deduction of up to 1.50 lakh under Section 80C of the Income Tax Act, 1961.
Ø Provide double benefit of tax saving and capital gains.
Tax-saving Benefit of ELSS Funds
· Income tax benefit - Investments made in ELSS schemes are eligible for deduction from taxable income under Section 80C of the Income Tax Act.
· Lower lock-in period - In comparison to traditional investment avenues like PPF, NSC under section 80C of the Income tax Act, ELSS funds have the shortest lock in period of 3 years.
· Tax-free dividends/Capital gains - Dividends declared under the ELSS scheme during the investment period are tax-free. The profits on the sale of ELSS units are treated as long-term capital gains, and are not subject to tax.
· Higher return potential - ELSS funds invest a large part of the fund in equity, which despite short-term volatility has the potential to build wealth over the long term.
Who should invest in ELSS Funds?
Ø Investors looking for wealth creation over the long term.
Ø Investors looking for tax deductions under Section 80C.
Ø Investors having a time horizon of 3 years or more.
How to start an ELSS account?
There are two ways to invest in ELSS Funds:
o Invest a fixed amount every month through a Systematic Investment Plan (SIP) in ELSS and ease the burden of large investments towards the end of the financial year.
o Invest a lump sum amount at any point of time.
Why SIP is the best method for ELSS?
o One of the best ways to invest is to save and invest on a regular basis. SIP is an investment method in which an investor invests small amounts in mutual funds at regular intervals.
o In addition, SIP helps an investor take benefit of the volatility in the stock markets by rupee cost averaging and helps garner the advantage of compounding. Investment in an ELSS through SIP provides an investor the best combination of tax savings and capital appreciation. The minimum investment in an ELSS through the SIP route can be as low as 500.
o The lower lock-in period of 3 years in comparison to other tax savings instruments and the potential to take full advantage of growth through equities make ELSS funds a preferred investment option.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
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