Taxation Benefit with Mutual Funds

There are various categories of mutual funds -equity-oriented, debt-oriented, hybrid, thematic etc. and each of these have a sub-category that address to a set of investment objectives or needs.

At the time of investing, if you are looking for investment up to Rs 1.5 lakh to save Tax under Section 80C of the Income Tax Act, 1961, Equity Linked Savings Scheme (ELSS) is the answer.

It’s not easy to watch your hard earned savings simply getting deducted in taxes. So, with the beginning of the new financial year, we’re giving you a quick run through about how you can save your hard earned money by investing in a Tax Saving (ELSS) scheme.

An ELSS (Equity Linked Saving Scheme) could become your best choice if you’re looking for:

  1. Deductions under section 80C of the Income Tax Act, 1961
  2. Opportunity to invest in the equity markets
  3. Long term Capital appreciation
  4. Shortest lock-in period of all the tax saving instruments under Section 80C


ELSS is an open-ended equity-oriented mutual fund scheme that invests a minimum 80% of its assets in equity & equity related instruments.

The investment objective of an ELSS, broadly, is to build on your investment corpus by investing primarily in equity and equity-related instruments. A unique feature about ELSS 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 cannot redeem your investments before the completion of three years from the date of the investment


Understand taxation in mutual fund

Income from sale of ELSS and other equity mutual funds are called as capital gains. This income is taxable in the hands of investors. The tax to be paid on the capital gains depends on the time period for which the investment was held. The minimum holding period for long term capital gains in equity funds is one year. Gains made on an investment in equity mutual fund sold before completion of 12 months from the date of purchase is termed as short term capital gains. Gains on any investment held over 12 months is long term capital gains.

Short term capital gains (if the units are sold before one year) in equity funds are taxed at the rate of 15% plus 4% cess.  Long term capital gains tax in equity funds is 10% + 4% cess provided the gain in a financial year is over Rs 1 Lakh. Long term capital gains upto Rs 1 Lakh is totally tax free. *

When it comes to ELSS after the lock-in period of three years, long term capital gains (LTCG) tax on mutual fund redemption applies, as per the current tax rules.

Whereas when it comes to debt mutual funds, short term capital gains tax is applicable as per the investor’s Income tax slab rates for a period less than three years whereas the rate of long-term capital gains tax for period exceeding three years is 20 percent with indexation benefit.

For those investors looking at an option to save tax, and earn risk adjusted returns from your investments, could consider adding ELSS mutual fund to your portfolio. The simplest thing to do would be to invest in an ELSS fund, which helps you build wealth and save tax.

Remember, though saving tax liability is a major purpose behind investment in tax saving fund; any investment should also deliver some return. Hence, while evaluating your options for the best fund to invest in, you need to look at the return column too. Do not forget that as an investor, you should know the risk and reward attached to investment before taking the plunge with your hard earning money.

A famous American Wealth Manager, Barry Ritholtz once said “When it comes to investing, there is no such thing as a one-size-fits-all portfolio.” Therefore, personalization is important when you construct a mutual fund portfolio. Save tax conveniently by investing in ELSS Mutual Fund.

*As per existing income tax guidelines for the FY  2021-22

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.