How To Save Tax With Investing In Equity Mutual Funds?

 

Investing in equity mutual funds offers dual advantages: potential wealth accumulation and tax savings. Equity mutual funds, primarily invested in stocks, often serve as a favorable option for long-term financial goals. Let’s delve into how equity mutual funds can help save tax, particularly under the purview of Section 80C and other relevant sections of the Indian Income Tax Act.

Primarily, one of the most popular tax-saving instruments within equity mutual funds is the Equity-Linked Savings Scheme (ELSS). Under Section 80C of the Indian Income Tax Act, investments up to ₹1.5 lakh in ELSS can be deducted from the investor's taxable income each fiscal year. If you're in the 30% tax bracket, investing ₹1.5 lakh in ELSS could save you up to ₹46,800 in taxes, which is a significant saving (₹1,50,000 * 30% = ₹45,000, excluding cess).

Primarily, ELSS funds come with a lock-in period of three years, the shortest among all 80C tax-saving options like Public Provident Fund (PPF) and National Savings Certificate (NSC), which have longer lock-in periods. This three-year lock-in encourages individuals to stay invested and potentially realize the benefits of market growth. Additionally, long-term capital gains (LTCG) from equity funds up to ₹1 lakh are exempt from tax per annum, offering further tax-efficiency.

Another primary benefit is that dividends received from equity mutual funds were tax-free up to ₹10 lakh under Section 10(34), but post-2020, dividends are added to the total income, and tax is applicable as per the individual's slab rate. However, systematic investments and prudent financial planning can help mitigate this tax implication.

Investors can leverage Systematic Investment Plans (SIPs) in equity mutual funds to spread their investment across various market phases. For instance, investing ₹10,000 per month in an ELSS fund throughout a fiscal year could accumulate ₹1.2 lakh, providing tax benefits under Section 80C while also potentially yielding appreciable returns.

A disclaimer: Investors must perform due diligence and consider all inherent risks when trading in Indian financial markets. It's imperative to weigh the pros and cons, and consult financial advisors to tailor investments according to personal financial goals and risk tolerance.

In conclusion, equity mutual funds, particularly ELSS, remain an effective tool for tax-saving and wealth creation. Strategic investment aligned with one's financial objectives can make a significant difference in realizing long-term financial goals.