Retail investors, often do not think about tax consequences when making investment decisions. For example, an investor feels happy if he gets 7 – 8% interest from a fixed deposit scheme. However, if the interest income is fully taxable, and it usually is, then the effective post tax return for the investor in the highest tax bracket is only 4.6 – 5.3%
Mutual funds, on the other hand, are one of the most tax friendly investment options available to Indian investors. An important point to note in mutual fund investments is that, an incident of tax arises only upon the sale of units of a mutual fund scheme.
Taxation on investment gains are classified into 2 categories – long term capital gains tax (LTCG) and short term capital gains tax (STCG). For the sake of convenience and understanding I have explained the LTCG and STCG with regards to the two type types of mutual funds investments: equity funds and non-equity funds (debt funds) .
As easy as understanding the features of your new phone, isn’t it ?
So if you are looking to invest in equity or debt schemes or are ready to exit your investments into mutual funds the above can give you a quick understanding of the tax implication.
ELSS Schemes of mutual funds (with tax benefit under Section 80 C, of the Income-tax Act,1961) :
Investments in Equity Linked Savings Schemes or ELSS mutual funds qualify for deduction from your taxable income under Section 80C of the Income Tax Act, 1961. The maximum investment amount eligible for tax deduction under Section 80C, is ₹1.5 lakhs. Investors in the highest tax bracket (30%) can therefore save up to ₹46,350 in taxes (₹1.5 lakhs x 30.9% tax + cess) by investing in ELSS mutual funds.
Please note that ₹1.5 lakhs is the overall 80 C cap including all eligible items like, employee provident fund (EPF) contribution (deducted by your employer), PPF, life insurance premiums, NSC and ELSS mutual funds etc.
Whats more? You can also do a SIP (Systematic Investment Plan) into an ELSS and systematically save, create wealth and also save taxes, all in one GO !! Happy Tax Saving…
Author: Mr. Nirmal M Jain | Mr. Nirmal M Jain is a Co-Founder at HappyWise Financial Services. He has over 15 years of experience in the Financial Planning Sector. He has been a mentor to several people, and has helped them to understand investments, stocks, mutual funds, financial planning, personal finance and above all his favorite term “The Power Of Compounding!”.