Mutual funds; Offer 3 Types of Income Tax Savings Benefits..!
by Mr.
Srikanth Meenakshi, FundsIndia.com
There are 3 types of
income tax savings one can have with investing in mutual funds
I. Income Tax deductions
2. Income tax exemptions and
3. Income indexation benefits.
I. Income Tax deductions
The first one, tax
deduction, applies only to equity-linked saving scheme (ELSS), which are tagged
as tax-saving schemes. Using these funds, the money invested in them would be
subtracted (deducted) from the taxable income of an investor, thereby reducing
the tax outgo.
Investments in these
funds are locked for 3 (Three) years but any gains after this period would be
tax exempt. There is a limit of Rs.1.5 lakh on this annually.
2. Income tax exemptions and
The second type tax
exemption would apply to domestic equity oriented funds.
Many equity funds such
as large-cap funds, diversified funds, and balanced funds would fall in this
category.
In this case, the
profits made after at least 1 year of holding will be considered ‘long-term
gains’ and be exempt from tax. However, the money invested in the fund itself
would have to be after payment of tax.
3. Income indexation benefits.
The third type,
indexation benefit, applies to all other types of mutual funds, specifically
debt funds, and provides the benefit of reducing the tax outgo by reducing the
reportable gains from an investment. You are investing in two tax deductible
funds (for a total of Rs. 72,000 per year), and in a balanced fund (for Rs. 36,000
a year).
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| Srikanth Meenakshi, FundsIndia.com |
You will get the benefit
of reducing your taxable income with the first fund, and exemption from
taxability of long-term gains from your balanced fund.
The category of funds
that you have chosen fit your timeline, risk tolerance, and objective. In terms
of fund selection, you are doing fine with your tax-saving funds.
For the balanced fund,
please go with ICICI Prudential Balanced fund.
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