How Much Tax Can be Saved using Mutual Funds Investment
Investment in mutual funds is one of the leading trends today. Thanks to the ever-growing reach of media, people today are more than aware of the knick-knacks of mutual fund schemes. Additionally, what makes mutual funds especially popular is their user-friendliness and customer oriented essentialities, not to mention such tenets as low risk and relatively high returns.
Tax-Saving mutual funds have become one of the most vital investment trends today. Indeed, the inherent significance of saving tax is beyond question. As a result, a majority of mutual fund investors tend to look forward to ways to save tax as much as possible.
So far as tax-saving mutual funds are concerned, a majority of mutual fund schemes do provide considerable tax benefits under Section80C of the Income Tax Act of India. Indeed, mutual funds tax benefits cover a broad chunk of the quintessential investor aspiration. Hence, their popularity among the common lot!
Importantly, a potential investor should take cognizance of the fact that the potential success of any tax saving mutual fund plans depends acutely on his or her financial clarities. In other words, it is important to weigh every monetary preference and futuristic aim before deciding to invest in a mutual fund scheme. Indeed, the clearer the vision the better the use of the plan.
One of the leading aspects of tax-saving mutual fund schemes is the risk choice furnished by them. Additionally, to continue in the same strain, taking cognizance of one’s risk appetite constitutes a fundamental portion of any investment whatsoever. So far as mutual fund schemes are concerned, most people generally tend to invest in low-risk schemes to suit their respective risk taking abilities. However, the point to be underscored is that a potential investor should be perfectly aware of his or her own risk-taking attitude before deciding to invest.
Tax Saving Mutual Funds
The best tax-saving mutual fund instruments include the likes of ELSS and investment in relevant equity markets. Although there may be other potential tax saving mutual fund tools, these two remain the leading proponents.
As mentioned earlier, all the benefits are accrued as per the official provisions under Section 80C of the Income Tax Act of India. Accordingly, there are many tax saving mutual funds such as ELSS and SIP. Each mutual fund scheme comes equipped with a specified lock-in period. A lock-in period is defined as the span of time during which the concerned investor cannot withdraw his or her money.
So far as the lock-in period is concerned, ELSS has a lock-in period of 3 years. It is the same with SIP mutual fund scheme, too. Importantly, so far as the withdrawal of the money is concerned, the concerned policyholder can retrieve only a limited number of units at the current NAV. The Net Asset Value is especially vital in the case of withdrawals. The amount of a particular withdrawal is reflected in the amount of the current NAV.
Tax Saving Mutual Funds Characteristics
In order for the potential investor to comprehend the core essentiality of tax saving mutual funds, it is imperative to note the most fundamental characteristics of the same. The following are some of the most elementary features of mutual funds with tax benefits:
- As stated earlier, the fundamental variant of a tax saving mutual fund is the ELSS. Certainly, there may be exceptions to the same. However, ELSS is the conventional clone of the tax saving mutual fund. Additionally, it is important to keep in mind that broadly all mutual fund schemes are open-ended.
- It is vital to keep in mind that there are many mutual fund schemes which may require the concerned investor to shell out a specified amount of money to the concerned fund furnishers. Also known as the entry load/exit load, these are common to a majority of mutual fund schemes.
- Broadly speaking, the specified lock-in period of a majority of conventional tax saving mutual fund schemes is not more than three years. A lock-in period is defined as the span of time during which the concerned investor cannot withdraw his or her money.
- As mentioned before, the risk ratio of tax saving mutual fund schemes counts on the subjective preference of the concerned investor. In other words, depending on the kind of investment, the risk could either be low, medium or high.
- Importantly, a potential investor should not expect quintessential tax benefits on indefinite amounts. While it is true that there are no upper limits specified, it is important to underscore the fact that tax benefits will apply only to investments which have not exceeded Rs. 1 lakh.
- So far as the limits of the investment are concerned, the lower limit, generally speaking, is Rs. 500. There are no upper limits for making investments.
Those above are only some of the most fundamental aspects of a conventional tax saving mutual fund instrument. Essentially, the characteristic entry/exit feature may not be considered a potential impediment. Also, since tax-saving mutual fund schemes are usually open-ended ones, they come equipped with the related nomination advantages.
To continue in the same strain, tax-saving mutual fund schemes generally belong to the likes of ELSS and open-ended schemes. Consequently, they function in accordance with the essentialities of a typical open-ended type. Subsequently, there are two types of mutual fund schemes: growth scheme and dividend scheme.
Growth schemes and dividend schemes tend to vary on certain core aspects. For instance, dividend schemes do not usually tend to constitute a particular lock-in period. Additionally, they automatically become eligible for all the relevant tax benefits under Section 80C of the Income Tax Act of India. Intriguingly, what is special about a dividend scheme is that it allows the concerned investor to earn a specified amount of additional income. On the contrary, growth schemes are less popular for want of such sterling features.
Why Tax Saving Mutual Funds?
Indeed, why should one avail of mutual funds with tax benefits? Already there are such investment schemes which do allow the concerned investor to avail of the relevant tax benefits under the Income Tax Act of India. What is it about tax saving mutual funds, then?
As stated earlier, one of the leading benefits of mutual funds with tax benefits is the fact that they are less risky ventures. Apart from that, the following are some of the most elementary reasons why one should avail of mutual funds with tax benefits:
- As mentioned earlier, a majority of tax saver mutual fund schemes are usually open-ended. Consequently, it is important to note that a potential investor can easily make investments throughout the year.
- What especially appeals to potential investors is the tenet that in tax saver mutual funds, one can avail of the relevant tax benefits for up to Rs. 1.5 lakh. Indeed, it is here that mutual fund schemes with tax benefits concentrate their worldwide appeal.
- To continue in the same strain, it is important to underscore that one of the leading aspects of such mutual fund schemes is the fact that the long-term capital gains are not subject to any kind of taxation whatsoever.
- The versatility of the portfolio is yet another reason why one should invest in tax saver mutual fund schemes. Naturally, the size of a portfolio is inversely proportional to the number of losses.
- Evidently, futuristic financial aims constitute a major chunk of the investor’s plans. The chief aspect of any tax saving mutual fund scheme is the fact the one can conveniently use these funds in order to meet future expenses at ease.
- So far as withdrawal is concerned, it is necessary to consider certain things. First and foremost, it is generally advised not to make any kind of withdrawals before the lock-in period formally terminates as the same money could be used to cope up with later financial contingencies.
- At the same time, what especially marks these schemes apart is the fact the concerned investor, if the need arises, may withdraw the number of dividends earned, if not the principal, during the course of the lock in Indeed, it is the flexibility of the mutual fund schemes which attracts a plethora of investors.
- Coming to the aspect of the lock-in period, it is easily convenient to note that a majority of tax saver mutual fund schemes have a lock-in period of not more than three years. Indeed, the short-term investment aspect of mutual funds automatically entails the low-risk ratio and equally high liquidity.
- Although there might be exceptions, a majority of mutual fund prospects are elementarily looked after by a particular fund manager. As lay investors may not always be conscientious about the proceedings of the technical aspects, the presence of an expert naturally alleviates the concerns.
- As mentioned before, what is especially notable about tax saver mutual fund schemes is the fact that a potential investor is not goaded into investing right away in a scheme. Simply put, investors can conveniently avail of a monthly style of investing. Eventually, what is especially advantageous about this feature is that investors are better placed in their aims and can afford to make unhurried investments after having weighed in all the relevant factors.
The aspects above only serve to hint at a perfunctory portrait of the essential tax saving mutual fund scheme. What is more, the pliancy inherent in such mutual fund schemes is reflected in the potential of the investor to switch between funds in accordance with his or her preferences.
Importantly, NRIs may also invest in tax saver mutual fund schemes.
Mutual Funds with Tax Benefits: The Spots
Are mutual funds with tax benefits not with blemish? Importantly, in order for the potential insured to pick up the most appropriate scheme, it is imperative to factor in both merits and demerits of the subject.
Although it might appear that the benefits outstrip the demerits, it is none the less significant to consider the grey areas in order to get a full picture of one’s investment future. To start with: ELSS, specifically speaking, is not suitable especially to the common lot generally averse towards taking risks.
As mentioned before, a majority of tax saving mutual funds are ELSS/open-ended, it is important to take it into consideration. Broadly speaking, ELSS investors depend heavily on the volatile stock winds. Indeed, the very fluctuation inherent in such schemes is a considerable limitation.
Additionally, it is important to keep in mind that one of the leading demerits of an ELSS is that the investor may not withdraw any amount of money before the date of maturity. On top of that, as per the latest DTC draft revisions, ELSS is proposed not to come within the purview of the exemption of tax under the Income Tax Act of India.
Those above are only some of the fundamentally recognized limitations of tax saver mutual funds. Coupled with the performance ratio of the stock markets, most investors tend to avoid such schemes primarily in this regard. And, to round it off, it is essential to keep in mind that eventually, the relevance of ELSS as tax saving instruments depends on the elements in the DTC.
Clearly, tax-saving mutual funds hold special sway among conventional investors across large swathes of the country. Indeed, the urge to save tax as much as possible is not only natural but legitimate. Additionally, it is equally significant to consider the fact that a majority of tax saving instruments doing the rounds in the market holds appeal so far as their inherent liquidity aspects are concerned.
As ever, the success of an investment depends on the minutely calculated financial essentialities of the concerned investor. Importantly, the clearer the financial aims, the better the prospects of a scheme. Therefore, it is imperative to clarify one’s own pecuniary preferences in order to better judge the patterns of the myriad investments schemes out in the open.