Tax Benefits of Investing in Mutual Funds in India
Posted In | Finance | Accounting Software | India Accounting TaxMutual Funds are one of the most popular investment options in India. But, did you know that investing in Mutual Funds can also provide tax benefits? Yes, you heard it right. Investing in certain types of Mutual Funds can help you save on taxes. Here, in this article, we will delve into the tax benefits of investing in Mutual Funds in India.
1. What are Mutual Funds?
Mutual Funds are investment schemes that pool money from various investors to invest in diversified securities such as stocks, bonds, and other assets. The Mutual Fund is managed by a professional fund manager who makes investment decisions based on the fund's objectives.
2. Taxation on Mutual Funds
The taxation on Mutual Funds in India depends on the type of Mutual Fund and the holding period. The type of Mutual Funds can be broadly classified into Equity Mutual Funds and Debt Mutual Funds. The holding period refers to the time duration for which the investor stays invested in the Mutual Fund.
3. Tax Benefits on Equity Mutual Funds
Equity Mutual Funds are those funds that invest at least 65% of their assets in equity shares of companies. If the holding period of these funds is more than one year, then the gains are considered as Long Term Capital Gains (LTCG). These are taxed at 10%, if the gains exceed Rs.1 lakh in a financial year.
4. Tax Benefits on Debt Mutual Funds
Debt Mutual Funds are those funds that invest in debt securities. If the holding period of these funds is more than three years, then the gains are considered as Long Term Capital Gains (LTCG). These are taxed at 20% after indexation.
5. Section 80C Benefits
Investments in certain types of Mutual Funds like Equity Linked Savings Scheme (ELSS) qualify for tax deductions under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to Rs.1.5 lakh in a financial year by investing in ELSS.
6. Dividend Distribution Tax (DDT)
Earlier, Mutual Fund houses had to pay Dividend Distribution Tax (DDT) before distributing dividends to investors. However, this tax was abolished in the 2020 Union Budget. Now, the dividend income is added to the investor's income and taxed according to the individual's income tax slab rate.
Investing in Mutual Funds not only provides potential returns but also offers tax benefits. However, it's essential to understand the taxation rules on Mutual Funds to make the most of your investments. It's always advisable to consult a financial advisor or tax consultant before making investment decisions.