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| September 8, 2021

Tax Benefits of Investing in Mutual Funds


With so many investor education initiatives in India, mutual fund investments have become increasingly popular in recent years. As a financial instrument, mutual funds allow investors to invest in a variety of financial assets by utilising the expertise and knowledge of qualified fund managers. The biggest advantage of mutual funds is that they provide higher returns than typical investment options such as fixed deposits.

However, are you aware of what happens to the taxes that investors pay on their earning? Are there any tax advantages while investing in mutual funds? Well, if you invest in a tax-saving mutual fund, you qualify for tax benefits under Section 80C of the Indian Income Tax Act, 1961.

Tax Saving Mutual Funds

Tax-saving mutual funds are similar to other mutual funds, but with the extra benefit of tax savings. These tax-saving mutual funds have a unique characteristic in that the investments made in them are eligible for tax advantage. The majority of tax-advantaged mutual funds are ELSS (Equity Linked Savings Scheme) plans that participate in the growth-oriented stock market.

How do the Tax Saving Mutual Funds Work?

A mutual fund's invested capital is added to the pool when an investor makes a purchase. The fund's portfolio corpus is then invested in the stock market in a way that even if one investment loses money, the other manages to offset the loss.

What are the Benefits of Tax Saving Mutual Funds

Here are some of the most important of the top tax benefits of investing in mutual funds:

  • Tax benefits of up to Rs.1.5 lakh are available on investments made in these schemes.

  • Long-term capital gains are not taxed under these plans.

  • These programmes may be used to save for future expenditures such as buying a car or putting down a down payment on a property.

  • SIPs (Systematic Investment Plans) allow investors to invest on a monthly basis, eliminating the need to invest all at once.

  • The assets in the portfolio are not concentrated in one location; the portfolios are kept varied to reduce the chance of catastrophic losses.

  • If you do not withdraw your money, it will continue to grow and provide you with a substantial sum of savings for a rainy day.

  • While you won't be able to withdraw the capital, you will be able to withdraw the dividends received, even if the lock-in period is still in effect.

  • Other investing alternatives have a lock-in term of 6 to 15 years, while these mutual funds only have a 3-year lock-in time.

  • Investments can be made at any time of the year because these plans are open-ended.

  • The funds are properly managed by skilled fund managers who have a thorough understanding of the market. As a result, even people with no prior understanding of the market can participate in these funds.


What are the Features of Tax Saving Mutual Funds?

The following are the unique characteristics of equity-linked savings plans that make them a lucrative investment choice for investors who choose the best mutual fund for tax benefit:

  • Stocks and equity-related securities account for at least 80% of the entire investible corpus.

  • The fund invests in a variety of market capitalizations, themes, and industries to diversify its stock holdings.

  • There is no maximum investment term. However, there is a three-year lock-in term.

  • Income is classified as long-term capital gain (LTCG) and taxed according to current tax laws.

Why should you invest your money into ELSS Tax-Advantaged Mutual Funds?

ELSS Tax Saving Funds provide a variety of advantages, including:

Diversification: Most ELSS funds invest in a wide range of firms, from small-cap to large-cap, and in a variety of industries. This helps you to broaden your investment portfolio's diversification.

The minimum amount is low: Investors can start investing in most ELSS plans with as little as Rs.500. This guarantees that you may begin investing without first building up a sizeable investment portfolio.

SIPs: While you may invest a large sum in an ELSS plan, most investors prefer the SIP approach since it allows them to contribute in small sums while still providing tax benefits and the chance to build wealth.

Furthermore, you can invest as much as you like but only receive tax advantages up to the amount specified in Section 80C of the Income Tax Act. You can also opt to continue invested after the three- year lock-in term for as long as you like.

A mutual fund is a trust that pools the money of participants who have similar financial objectives. The fund's corpus is subsequently put in investment options to satisfy the mutual fund tax exemption scheme's stated investment goals. The income generated by these assets, as well as the capital gains obtained, are distributed to unitholders in proportion to the number of units possessed by them.

If you are interested in making mutual fund investments, we are here to guide you each step of the way. Visit your nearest Muthoot Finance branch and speak to our expert about your financial goals which will help us build a diversified investment portfolio to help you achieve your short and long term goals.

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