How to save taxes with MFs
Written by axis | Published :April 11, 2022 , 9:03 am IST
No one likes to give up on their hard-earned cash. However, if your income is above the threshold limit – paying taxes is inevitable. One of the easiest ways to save your hard-earned money is by reducing your tax liability. When you reduce your tax liability, you have extra cash in hand that can be either re-invested or used to fulfill your dreams. There are several ways to reduce your tax. One of the popular ways to reduce your tax liability is by investing in ELSS mutual funds.
What is ELSS?
Equity Linked Savings Scheme (ELSS) [LP1] are tax-saving mutual funds that come under Section 80C of the Income Tax Act. If you invest your money in the ELSS fund, the section allows you to claim benefits from your taxable income. You are allowed to invest up to Rs 1.5 lakh in tax-saving funds like ELSS.
ELSS is an equity diversified fund that is linked to the equity market. Your money is invested in equity and equity-related securities.
ELSS funds invest a minimum of 65% of the portfolio in equities, while the remaining may be allocated towards fixed-income securities.
Lock-in in ELSS funds
Like any other tax-saving option, ELSS also has a lock-in period. ELSS has a lock-in period of three years, the lowest among all the other tax-saving options under section 80C. The money you put in the ELSS fund today, you can only redeem after three years.
How to invest in ELSS mutual funds?
There are two ways to invest in ELSS mutual funds:
Lumpsum amount: You can invest a lump sum amount in the ELSS fund every financial year and save taxes.
Systematic Investment Plan (SIP): You can opt for a SIP where you make a monthly investment in the ELSS fund. You can divide your annual amount to be saved by 12 and invest the corresponding amount every month.
You can choose the option that works best for you.
Advantages of ELSS funds:
Below are some advantages of ELSS funds:
Investing in ELSS funds [LP2] gives you a dual advantage – tax benefit and capital appreciation.
These have the shortest lock-in period compared to other tax-saving investment options.
Taxation on gains for ELSS investment
Your gains from ELSS funds are considered long-term capital gains and are tax-free up to a limit. In a financial year,
LTCG tax on gains from ELSS up to Rs 1 lakh is NIL
LTCG tax on gains from ELSS above Rs 1 lakh is taxed at 10%
Mutual fund investments are subject to market risks, read all scheme-related documents carefully
