How Mutual Funds Deduction Can Save Income Tax? | HDFC Bank (2024)

FAQs

How does mutual fund save tax? ›

ELSS mutual funds provide tax deductions of up to Rs 1,50,000 a year under the provisions of Section 80C of the Income Tax Act, 1961. This helps you save up to Rs 46,800 a year in taxes. However, note that your investments are locked-in for three years from the date of investment.

Some mutual funds, such as municipal bond funds, focus on investments that are exempt from federal income tax. If you do receive dividends or interest from a fund you hold, you'll likely receive an IRS tax form that shows your income from the fund for the year.

Mutual funds are not tax-free except for ELSS (equity-linked savings schemes or tax-saving funds) and some retirement funds. As per the Income Tax Act, under Section 80C, you can claim a deduction of up to Rs. 1.5 lakh for investments made in ELSS and can save taxes up to Rs.

Tax efficient mutual funds are designed to minimize the tax liabilities on your investment income, making them an attractive option for investors looking to optimize their after-tax gains. These funds use strategies such as low turnover rates and tax-loss harvesting to reduce taxable distributions.

Higher risk

THE RISK IS ALSO HIGHER since ELSS funds are directly linked to the equity market. Equity-related investments are more prone to market volatility.

The lock-in period for mutual funds refers to the duration during which investors cannot redeem or sell their investments. For example, Equity Linked Savings Schemes (ELSS) have a lock-in period of three years. This period is intended to encourage long-term investment.

Here are some strategies to consider to avoid long term capital gain tax (LTCG) on mutual funds: Systematic Withdrawal Plan (SWP): Set up an SWP to automatically redeem your mutual fund units regularly. By keeping withdrawals below Rs. 1 lakh per year, you may avoid LTCG tax altogether.

Are investment management fees tax deductible? No, they aren't – at least not until 2025. The Tax Cuts and Jobs Act (TCJA) enacted major changes to what investors can and cannot claim on their tax returns.

The income in the form of dividends from mutual funds (now called IDCW) will be taxed as 'Income from Other Sources' as per your income tax slab rate. If the dividend amount is above Rs 5,000 dividend will be subject to TDS as per Section 194K @10% for resident individuals, but if the PAN is not provided then @20%.

Mutual fund sales should be reported in Schedule CG of ITR-2 or ITR-3, depending on the nature of your other income. You need to provide details such as purchase price, sale price, and holding period.

How much tax will I pay if I cash out my mutual funds? ›

Profits on shares held a year or less are taxed at the rate for short-term capital gains, which is the same as the rate on your other income and might be as high as 37%. For shares held longer than a year, the rate will be 0%, 15%, or 20%.

ELSS is a type of Mutual Fund which allows you to claim for income tax deduction. You can save up to ₹ 1.5 lakhs a year in taxes by investing in ELSS, which is covered under Section 80C of the Income Tax Act, 1961.

Just as with individual securities, when you sell shares of a mutual fund or ETF (exchange-traded fund) for a profit, you'll owe taxes on that "realized gain." But you may also owe taxes if the fund realizes a gain by selling a security for more than the original purchase price—even if you haven't sold any shares.

Whether or not a taxable fund is a better choice for you will depend in large part on how much of your returns are likely to go directly to federal, state, and local taxes at the end of the year. In addition, consider whether the fund will be held in a qualified pension or retirement plan.

Some fund types, like total market stock index funds, are extremely tax-efficient, because they produce low dividends (that are mostly qualified) and capital gains. By contrast, bond funds can be extremely tax-inefficient, because the interest they produce every year is taxed at your full marginal tax rate.

For 2024, top tax-saving investments include life insurance, pension plans, health insurance, National Pension System (NPS), and tax-saving mutual funds. Each offers benefits under specific tax sections. By choosing these options wisely, you can reduce your taxes while growing your wealth for the future.

By investing in Equity Linked Saving Schemes (ELSS) through SIPs, you can take advantage of Section 80(C) of the Income Tax Act, 1961. This allows you to deduct up to Rs. 1.5 lakh from your taxable income, potentially saving you significant tax depending on your tax bracket.