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All You Need to Know about Tax Saving Mutual Funds

There are various provisions of the Income Tax Act 1961 that give individual tax-payer an opportunity to reduce his/her overall tax liability. Investments in certain schemes and instruments are allowed for deduction which reduces the overall taxable income of an individual. When evaluating different tax savings schemes, one option that investors can evaluate is tax saving mutual funds. An investment of up to INR 1,50,000^ in a tax saving mutual fund scheme is eligible for tax benefits under section 80C of the Indian Income Tax Act, 1961. Most of the tax saving mutual fund schemes are Equity Linked Savings Schemes (ELSS) schemes which invests predominantly in the equity markets. Investment in an ELSS scheme has the potential to offer individuals a dual advantage. Firstly, such an investment allows an individual to reduce his/her tax liability. Secondly, an investment in equities gives the investor an opportunity to generate potential returns over the long term.

How do Tax Saving Mutual Fund schemes work?

Tax saving mutual fund schemes predominantly invest in the equity markets and hold diversified portfolios that are well positioned to capture any upside in the equity markets and are relatively insulated from any downside. Certain things to keep in mind while evaluating an investment in an ELSS scheme:

  • Lock-in period of 3 years – investments made in an ELSS scheme are subject to a lock-in period of 3 years. If the investment is made       through a Systematic Investment Plan (SIP) then the lock-in period for each instalment is 3 years.
  • Max INR 1,50,000^ allowed for deduction - while there is no upper limit with respect to the amount that can be invested in a tax saving       mutual fund scheme, the amount that is allowed for deduction under section 80C of the Income Tax, 1961 is subject to a limit of INR       1,50,000^.
  • Risk profile – since these funds predominantly invest in equities and equity related instruments, they might carry a higher risk than other tax       saving options.
  • As per the current income tax rules, realised gains above INR. 1,00,000 on sale of listed equity shares and equity oriented mutual fund in a       single year are subject to Long-term Capital Gains tax at the rate of 10.4 per cent without indexation benefit.

Benefits of Investing in Tax Saving Mutual Funds:

  • The investments made in these type of funds are eligible for tax benefits up to INR 1,50,000^ under Section 80C of the Income Tax Act,       1961.
  • Most tax saving options come with a lock-in period of 5 to 15 years whereas tax saving mutual funds come with a lock-in period of just 3       years.
  • While the principal amount is locked-in, the dividend earned is paid out periodically.
  • Investors can either choose to make a lump sum investment in these schemes or can opt to invest through a Systematic Investment Plan.
  • Investments in such a scheme give an investor’s portfolio equity exposure.
  • The tax saving option that you choose as an investor should ideally be aligned with your unique risk-return requirements. A tax saving mutual fund is one of the options available to an individual investor.

^As per the Finance Act, 2005, read with notifications dated 3rd November 2005 and 13th December, 2005 issued by Ministry of Finance, subscription to the extent of Rs.150,000 in ELSS funds by Individuals and HUFs should be eligible for deduction u/s 80C of the Income Tax Act, 1961. Investors are requested to consult their tax advisor in this regard. The investments in such ELSS funds shall be locked-in for a period of 3 years from the date of allotment.

It is mandatory for all mutual fund investors to undergo a one-time KYC (Know Your Customer) process. For more info on KYC specifically on: the procedure for completing KYC, for changing address details, for changing contact details.
For changing bank details, visit bnpparibasmf.in/investor-centre/information-on-kyc
For more info on submitting a complaint or a grievance, visit https://www.bnpparibasmf.in/contact-us
Further, investors should ensure that they transact ONLY with SEBI Registered Mutual Funds listed under Intermediaries/Market Infrastructure Institutions on the SEBI website https://www.sebi.gov.in/intermediaries.html

An Investor Awareness Initiative.

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

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