Many of us invest in the last week of March, all thanks to the pressure built up by the deadline called financial year end. For such last minute investors, tax saving triggers many of their investments. Though it is not a wise idea to base all your investments on the tenet of tax saving, it is prudent to consider tax planning while investing your hard earned money in the light of your financial goal. Here is how mutual funds help us save on tax front:
Tax saving funds: Investments in equity linked saving schemes (ELSS) – commonly known as tax saving funds, bring in the tax deduction under section 80C of Income Tax Act 1961. You can invest up to Rs 1.5 lakhs in tax saving funds in a financial year and avail tax shelter. Tax saving funds invests in shares and the money so invested is locked in for three years.
You also benefit from the tax sops associated with returns earned on the investments in mutual funds.
Dividends: Dividends declared by equity funds are tax free in the hands of the investors. Tax saving funds, balanced funds, equity saving funds and arbitrage funds investing at least 65% of money in shares are treated as equity funds for the purpose of taxation.
In case of non-equity funds, dividends are subject to dividend distribution tax of 28.84%. Dividend declared by liquid funds, income funds, gilt funds and monthly income plans among other non-equity funds are subject to this rule.
Capital gains: The appreciation in value of mutual fund investments is termed as capital gains. All gains earned on investments in equity funds held for at least one year are treated as long term capital gains. There is no tax on long term gains earned on equity funds.
As investments in tax saving funds come with a three year lock in, it is a win-win situation for the investor on tax front. First – he gets tax benefit when he invests and second – all his gains in this scheme are tax free.
For short term capital gains earned on investments in equity funds, you are taxed at the rate of 15.45%.
In case of non-equity funds, gains earned on investments held for at least three years, are treated as long term capital gains and taxed at the rate of 20.6% post indexation. In case of short term capital gains, the investor should pay tax as per his income tax slab’s rate.
Capital gains taxes are to be paid by the investor only after sale of his investments.
STT: Securities transaction tax is payable on equity funds. When you sell equity funds you are charged STT at the rate of 0.001% of the traded value. This tax is payable irrespective of the size of gains or loss or the income tax slab the investor is subject to.
Goal based financial planning helps you to chalk out a time bound investment plan. While considering expected returns in your investment plan, always focus on post tax returns. Pre-tax returns can be deceptive in nature.
