For taxation purposes, we can divide the mutual fund into two categories; Equity and Debt. Tax on Mutual Funds such as fund of funds is treated as a debt fund even if the underlying instrument is investing in equity-related instruments. Tax on Debt Mutual funds withdrawal comes with indexation benefits when held for a duration exceeding three years.
Tax on Equity Mutual Funds
Tax on equity mutual funds depend on the duration of the holding period. Capital gains made are subjected to Short Term Capital Gains Tax and Long Term Capital Gains Tax. Long Term capital gains Tax apply if your gains are more than Rs.1 lakh a year. If you choose to redeem your holding within a year then you will be subjected to STCG which is 15% of the gains made. If you choose to redeem after a year, then the tax on your mutual fund is calculated as LTCG which is 10% of the gains made.
In equity funds, there’s a separate category called ELSS funds. A unique feature concerning ELSS investments is that compared to the other open-ended diversified equity mutual funds, investment in ELSS is subject to a compulsory lock-in period of three years. During this period, you will not be able to redeem your investments before the completion of three years from the date of the investment. After the lock-in, if you decide to redeem the investment on the realized gain, as per the current tax rules, LTCG tax applies.
Tax on Debt Funds
Like other Funds, Debt Funds are also subjected to capital gains tax which is Short Term Capital Gains Tax (STCG) & Long-term Capital Gains Tax (LTCG). If the holding period of Debt funds is less than 3 years then STCG is levied and if more than 3 years then LTCG is levied. Presently, the LTCG levied is 20% with indexation and STCG is taxed as per the investor’s tax slab. If the Income Tax Slab of the investor is 20% then the same will be levied on the Debt Funds gains in the case of STCG.
Indexation is a tool which is applicable on long-term investments. It helps an investor to adjust inflation while gaging the returns of the invested amount.
As inflation is gradually rising, what’s worth Rs. 1000 could be worth Rs. 1100 sooner in near future. Thus, inflation impacts the purchasing power of our money. The same amount makes the investor to buy lesser and lesser goods.
So how does indexation help us? To understand that let us first understand what is capital gains. A capital gain is nothing but the increase in the value of an investment over a specific period. If the NAV (Net Asset Value) of a fund was Rs.10 when you invested and is now Rs.15 while you plan to redeem it, that difference of Rs.5 is called capital gains. So we are yielding a capital gain of Rs.5 per unit when we redeem.
In the case of debt funds, we arrive at capital gains after indexing the purchase price of the investment. Indexation lowers the long-term capital gains tax which brings down your taxable income.
Imagine you invested Rs.1,00,000 in May 2015 in a debt fund of your choice. Today you choose to redeem your money. So you have gained Rs. 1,50,000 on your investment. Since your holding period was beyond 3 years you will not need to be required to pay tax on the entire amount of Rs.1.5 lakhs.
You will need to arrive at the indexed cost by using the formula:
ICoA = Original cost of acquisition * (CII of the year of sale/CII of year of purchase)
So the indexed cost will be 1,00,000 (240/301) = Rs.79,734.
So our Capital Gains will now be 1,50,000-79,734 = Rs.70,266.
In the above imaginary example using indexation, taxable income has been reduced to Rs. 70,266.
The benefit of indexation works best when your holding period is longer. For a holding period of 5 years, on average, the long-term capital gains tax on debt funds can come down efficiently. Thus indexation helps us to save tax on Long-Term Capital Gains and increases our earnings.
Remember, indexation is only subjected to Debt Funds & not applicable to Equity Funds.
Tax planning is usually done during the last three months of the financial season. Nevertheless, it is good if you plan it during the beginning of the financial year and avoid the rush of last-minute tax savings. Several options qualify for a deduction u/s 80C of the income tax act. One such option is the ELSS tax saving mutual fund that offers twin benefit of tax saving and wealth creation due to the equity component.
Equity-Linked Saving Scheme (ELSS), also referred to as the tax-saving funds, falls under the diversified category of mutual funds. As per SEBI categorization, they invest a minimum of 80% of the total assets in equity and equity-related instruments.
ELSS tax saving mutual funds have a relatively better long-term wealth-building potential than other range of tax-saving instruments such as life insurance premiums, PPF, NPS, NSC and others. Along with being one of the popular tax-saving instruments among the 80C tax-saving provision, ELSS (Equity Linked Savings Scheme) can also be an efficient investment option to achieve long-term financial goals, provided you invest for atleast 3-5 years.
Another advantage that ELSS tax saving mutual fund offers over other tax-saving avenues is the lowest lock-in period of three years from the date of investment. This gives the flexibility to investors to redeem or switch from their investments should they need. However, it must be noted that to enable the potential of wealth creation, investors should not redeem as soon as the lock-in is complete and stay invested for a longer term until his financial goals are achieved.
How much tax can ELSS tax saving mutual funds provide? While the actual tax benefit will vary between investors, you will be eligible for tax benefit if upto Rs.1.5 lakhs a year.
If you are looking for higher returns in ELSS tax-saving mutual funds of 2021, examine not just the tax-saving mutual funds of 2020, but look at the historical returns across market cycles. Also, you can look at a direct plan option if you are looking for a lower expense ratio and thereby provide you with better returns over the long-term. Most fund houses offer a minimum investment amount of Rs. 500 that you can start as an SIP. Investors need to note that each SIP in a mutual fund has a lock-in of three years.
If you are looking to achieve your long-term financial goals and save tax to yet to reach the threshold limit of ¹1.5 lakh Section u/s 80C annual limit, these tax-saving mutual funds can be a good option to consider.
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Patronize reputable footwear dealers:
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Today is a day of joy as is everyday. Today is a day to celebrate within us a new perspective of life.
Have you been partying all weekend and rejoicing in the holiday festivities. I say more power to you all if that’s what brings joy to your heart.
Now right here, I have a message from “The Angels of Love” for all of us.
The Angels truly are present for all of you.
You may say to yourselves, “How can this be? How come I can’t see them?” Or, “Angels are only fairytales for the kids.”
How remarkable is this that only kids can relate to Angels.
The truth of all this is that Angels are everywhere. Some can see us, others can hear us, some can feel us, others can and do perceive us. We are
ever-present available to support you in your daily lives.
We are here to open clear channels between you and your goals and future plans.
We are here to guide you as to what is truly your life’s passion.
We are here to be love in your lives.
We are here as an expansion of the Universe and so are you.
We are here and how you perceive us is perfectly fine.
We are here for you, plain and simple, you are not alone.
We are here as the presence of light in your lives.
Those whom choose to accept this truth, have witnessed the wonderful unexpected surprises in their lives.
We say to you with Love, Take this time to acknowledge us for we are quite nice and loving.
Some ask, “but I do not know your name?”
It is not important what you call us with respect to you. What is important is your intention. Please do not ever call upon us for unorthodox tasks, for we will not reply. We are here to support and assist you in enhancing your lives. Therefore, Please be kind to yourselves and others and reap the benefits of this unity the way it is designed to be.
With love we will let go and let you be Now.
With love we will shine our light on all whom choose.
With love we are the expansion of Divine Love.
With love we say to you all, have a Blessed Life. The Angels of Love May the Love and Light of God and the Universe surround you, your loved ones and the planet earth.
All the Wonders, Goodness, Grace and Blessings for all of us as we choose to be open and receptive all the time.
With God All Things Are Possible
Michelle Morovaty has dedicated her life to her global vision and life purpose of connecting people to people, to create oneness, and through support and universal guidance, educate people about the power within to heal oneself and others. Over the last seven years Michelle has healed herself from Lupus, other significant challenges and has taught many others how to do so as well. She uses her intuition and universal guidance to assist people through the healing process.