Tax Benefits of Investing in Mutual Funds

Investing in mutual funds is one of the easiest ways to accumulate wealth, but it isn't just the returns that make it an attractive option. Mutual funds also offer several tax benefits, which can be significant for investors in India. Compared to other investment options, such as stocks and bonds, mutual funds are a viable option for those looking to save on taxes. In this article, we'll delve into the tax benefits of investing in mutual funds and explain how you can take advantage of them.

1. ELSS (Equity Linked Savings Scheme)

Equity Linked Savings Scheme (ELSS) is a type of mutual fund that invests in equities and provides investors with a tax benefit under Section 80C of the Income Tax Act. ELSS has a minimum lock-in period of three years, and investors can claim up to INR 1.5 lakhs as a tax benefit annually. An additional benefit of ELSS is that it offers investors the potential to earn higher returns compared to other 80C investment options such as PPF and NSC.

2. Long-term capital gains tax

Long-term capital gains tax is a tax that is levied on the profit earned from the sale of an asset held for more than 12 months. In the case of mutual funds, if an investor holds the investment for more than 12 months, they are eligible for a long-term capital gains tax. The long-term capital gains tax rate for equity mutual funds is 10% for a profit of over INR 1 lakh, while for debt mutual funds, the rate is 20% with indexation benefit.

3. Short-term capital gains tax

Short-term capital gains tax is a tax that is levied on the profit earned from the sale of an asset held for less than 12 months. In the case of mutual funds, short-term capital gains tax is levied at the investor's tax slab rate. For example, if an investor is in the 30% tax slab, they are required to pay 30% of their short-term capital gains tax.

4. Dividend distribution tax

Dividend distribution tax (DDT) is a tax that is levied on the dividend received by the mutual fund investor. The dividend income of the investor is exempt under Section 10(35) of the Income Tax Act. However, the mutual fund company has to pay DDT before distributing the dividend to the investor, which reduces the amount that the investor receives. For equity mutual funds, the DDT rate is 10%, while for debt funds, it is 25%.

How to calculate tax liability in mutual funds

Calculating tax liability in mutual funds is similar to other investment options. It is calculated based on the investor's earnings and the applicable tax rate. An investor will have to calculate the tax liability on a mutual fund based on the type of mutual fund they have invested in, the holding period, and the tax slab under which their income falls.

To calculate tax liability on mutual funds, investors can use tax calculators available online, which make the process simple and efficient.

Top Mutual Fund Apps and Investment Platforms

Investors today can invest in mutual funds easily through several online platforms and mobile applications. Some popular mutual fund apps are as follows:

1. Groww

Groww is a popular mutual fund app that offers investors the opportunity to invest in mutual funds with ease and efficiency. They offer a wide range of mutual funds, and the app interface is user-friendly for beginners. It also offers investors insights on mutual funds, fund performance, and tax-saving investment schemes.

2. Paytm Money

Paytm Money is another popular mutual fund app that offers investors a hassle-free way to invest in mutual funds. It boasts of a secure payment gateway, personalized recommendations, and instant redemptions. The app offers various mutual funds managed by leading AMCs in India.

3. Scripbox

Scripbox is a mutual fund investment platform that provides investors with various mutual fund schemes to invest in. It offers investors an easy investing experience and personalized recommendations on the best mutual funds to invest in based on their risk profile and financial goals. Scripbox also offers beginner-friendly guidance on investing in mutual funds.

4. Angel Bee

Angel Bee is another popular mutual fund app that helps investors manage their investments digitally. The app offers customized investment portfolios and goals-based investment recommendations. Angel Bee provides several tools and widgets to help investors undertake their financial planning and achieve their investment goals. that helps investors manage their investments digitally. The app offers customized investment portfolios and goals-based investment recommendations. Angel Bee provides several tools and widgets to help investors undertake their financial planning and achieve their investment goals.

5. Bajaj Finserv App

Bajaj Finserv is a popular mutual funds app that provides investors with hassle-free investing options. The app offers a range of Mutual Fund investment options from different AMC's and supports SIP & Lumpsum investments. Through the app, investors can track their portfolios, invest in ELSS and other funds for tax saving purposes, and keep up to date with the latest market trends. Bajaj Finserv app also recommends the best mutual funds based on the investors' risk profile and investment goals. The app's user-friendly interface and streamlined investment process make it an attractive option for first-time investors.

Conclusion

Mutual funds provide investors with several tax benefits, including tax savings on long-term capital gains, tax-saving schemes under Section 80C, and dividend distribution tax. By investing in mutual funds, investors can benefit from the compounding interest and the potential for higher returns while simultaneously minimizing their tax liability. Remember to do your research before choosing a mutual fund to invest in, consider factors such as your investment goals, risk appetite, and financial needs. By investing in mutual funds, investors can gain both financial stability and long-term wealth creation.