How to Save Tax Through Mutual Funds?

 


Investing in mutual funds can offer several tax-saving opportunities. Here are some strategies to save tax through mutual funds:

  • ELSS (Equity Linked Savings Scheme): ELSS mutual funds are specifically designed for tax-saving purposes under Section 80C of the Income Tax Act. Investments in ELSS funds are eligible for a deduction of up to ₹1.5 lakh from taxable income in a financial year. Additionally, ELSS funds have a mandatory lock-in period of three years, which promotes long-term wealth creation.
  • Dividend Option in Equity Funds: If you're in a lower tax bracket, opting for the dividend option in equity mutual funds can be beneficial. Dividends from equity mutual funds are tax-free in the hands of the investor. However, it's important to note that the mutual fund company deducts a Dividend Distribution Tax (DDT) before distributing dividends to investors.
  • Systematic Withdrawal Plan (SWP): Instead of opting for dividends, you can choose a systematic withdrawal plan (SWP) from your mutual fund investment. SWP allows you to withdraw a fixed amount regularly from your investment. Since SWP withdrawals are treated as redemptions, they are subject to capital gains tax. However, if you hold the investment for more than three years, gains from equity mutual funds are taxed at a lower rate (long-term capital gains tax).
  • Tax-Saving with Debt Funds: Debt mutual funds can also be tax-efficient, especially for investors in higher tax brackets. Investments in debt funds held for more than three years qualify for long-term capital gains tax, which is taxed at a lower rate compared to short-term capital gains tax. Additionally, debt funds offer indexation benefits, which help in reducing the tax liability further.
  • Tax Harvesting: Tax harvesting involves selling investments at a loss to offset gains and reduce the overall tax liability. Mutual fund investors can use tax harvesting strategies, such as switching between funds or booking losses in underperforming funds to offset gains from other investments.
  • Investment in Tax-Free Bonds: Some mutual funds invest in tax-free bonds issued by government entities. These bonds offer tax-free interest income to investors. By investing in mutual funds that hold tax-free bonds, investors can generate tax-free income while benefiting from professional fund management.

Remember to consult with a tax advisor or financial planner before implementing any tax-saving strategies to ensure they align with your overall financial goals and tax situation.

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