Mutual Funds have gained tremendous popularity and many would say that they have become the investment instrument of choice for a large population. This can be attributed to the ease of investment and various electronic modes of investing in mutual funds. Using a systematic investment plan (SIP) you can conveniently start investing small amounts on a monthly basis and let your wealth accumulate.

Many people, however, do not consider the tax implications while investing in mutual funds. If not carefully understood and taken into account, the taxable component can cause a dent in your overall returns. Mutual Funds are, arguably, one of the most tax friendly investment instruments around. Let us examine some of the tax benefits that you can derive from your Mutual Funds investments.

Tax on Debt MF

In case of debt mutual funds, the minimum prescribed holding period is 36 months. In case the units are sold / redeemed before the completion of 3 years then the resulting Short Term Capital Gain (STCG) is taxed as per the individual income tax slab rate of the investor, plus the cess. However, when these units have crossed the requisite period of 36 months then the gains are qualified as Long Term Capital Gain (LTCG). These gains in a debt fund are taxed at 20% with the benefit of indexation. 

Indexation is a beneficial system through which you can reduce your tax liability as compared to tax obligations amounting from interest received on FDs, RDs and many other small savings schemes.. Firstly you need to derive the ratio of the cost of inflation index of the year of sale versus the index of the year of purchase. Then you can index your cost by multiplying the purchasing cost with this derived ratio. Finally, you need to subtract the indexed purchasing cost from overall sales/redemption value. 

Tax on Equity MF

As per the standard definition, any fund which invests more than 65% of its assets in listed public companies falls under the equity MF segment. In case the fund scheme uses an ETF to invest in those companies, then the limit is 90%. As per the laws of the land, any profit made on the sale/redemption of an equity oriented scheme after 12 months of purchase is referred to as Long Term Capital Gain (LTCG) and is taxed at flat 10%. This is after the initial deduction of Rs. 1 Lakh, without any indexation. If the units were sold/redeemed prior to the completion of the 12 months period, then Short Term Capital Gain (STCG) is applicable, which is at flat 15%. These percentages are excluding cess. 


Equity Linked Savings Scheme (ELSS) is a direct way of investing in mutual funds to save tax. They are well known as a popular tax saving instrument which provides you market exposure at the same time. Many investors use it as a means of creating a diversified portfolio while reaping the tax benefits provided under Section 80C of the Income Tax Act. As per this section, investments upto Rs. 1.5 Lakhs each year are deductible from the overall taxable income. Based on the slab of the income tax rate that you fall under, this can be a substantial saving. Moreover, ELSS allows your capital to get appreciated at the same time due to the equity exposure in the market. While ELSS comes with a lock-in of 3 years, it is still one of the shortest lock-in periods when compared to PPF, NSC and other traditional tax saving instruments. 

Tax Free Dividends

Another beneficial aspect of investing in mutual funds is the associated tax free dividends. Mutual Funds pay out dividends on a quarterly, semi-annually and annual basis. By investing in tax saving mutual funds like ELSS funds, the dividend received is not taxable without any upper limit or capping involved. This is conditional to having opted for the dividend option of the MF. In case you have opted for growth or dividend reinvestment options, then this tax free dividend will not be applicable to since there is no payment being received by the investor.

In Summation

Mutual Funds are a great way to manage your own money and help grow it over the course of time. There is a lot of flexibility associated with investing in mutual funds. You can start with as low as just Rs. 500 per month and using the systematic investment plan option, put this money in the mutual fund of your choice. There is also the option of investing lump sum amounts in one go. You can do your own research or consult your advisory specialist to understand the ideal funds which will provide the right balance of market returns and tax saving benefits. As is the case with any investment tool, there is a risk aspect involved. However, by getting to know about the fund scheme details, you can conveniently compare and decide which fund to invest in based on your individual risk appetite. 

Investment in mutual funds can be done conveniently from your own home using your internet enabled smartphone. By downloading and registering on a fast and reliable mobile / web based app like the Dhanush app from Ashika Stock Broking Limited, you can use the same account to manage several different kinds of investments and other securities. You will also get access to round the clock advisors and consultants to help you maximize your earning and possible tax savings and other tax related benefits that you may not have considered. 

Leave a Reply

Your email address will not be published. Required fields are marked *