A Mutual Fund is a fund which primarily collects money from the public and then invests the same in specified securities on behalf of its investors.

Mutual Funds can broadly be categorised into 2 categories:-

  1. Equity Mutual Funds
  2. Debt Mutual Funds

Equity Mutual Funds are those mutual funds which invest a major chunk of their investments in Equity Shares whereas Debt Mutual Funds are mutual funds which invest a major chunk of their investment in Debt/ Fixed Income earning instruments.

To encourage the people to invest in mutual funds, the govt offers various tax benefits to people who invest in equity mutual funds. This article is mainly focussed on the Tax Benefits of Equity Mutual Funds in India. These benefits have been discussed below in detail.

1. Section 80C Tax Benefit of Investing in Equity Mutual Funds

Equity Mutual Funds are those Mutual Funds wherein a major chunk of the amount is invested in equity market i.e. the stock market. These ELSS Funds purchase the shares either through IPO or through the stock markets.

The amount invested in these mutual funds can be claimed as a Deduction under Section 80C. Although there is no limit for investing in these mutual funds, the maximum amount of deduction that can be claimed under Section 80C for investing in these type of Mutual Funds is Rs. 1,50,000.

This Deduction of Rs. 1,50,000 allowed under Section 80C is the total cumulative deduction which is allowed in any financial year for investments in various specified instruments. The most popular of these instruments under which Deduction under Section 80C can be claimed are:-

2. Lock-in period of Equity Mutual Funds

The lock-in period of equity mutual funds which are allowed to be claimed as a deduction under Section 80C is 3 years. In other words, these mutual funds cannot be sold before 3 years.

The lock in period of 3 years of Equity Mutual Funds is the least when compared with the 5 year lock-in period of other popular tax saving instruments like PPF Account, National Savings Certificate, Tax Saving Fixed Deposit.

3. Tax Exemption on Dividend paid on Mutual Funds

The mutual funds regularly pay out dividends to its Investors. The dividend received by the investors from these mutual funds is tax free in the hands of the investors. In other words, no tax is to be paid by the investors on the dividend that is received from such mutual funds.

There is no maximum limit on the amount of exemption that can be claiming tax exemption on Dividend received from Mutual Funds.

4. Capital Gains Tax on sale of Mutual Funds

The value of a mutual fund is denoted by its NAV (i.e. Net Assets Value). The NAV keeps changing on a daily basis based on the performance of the mutual fund. A mutual fund is always purchased and sold at its prevailing NAV.

The Gains arising on the sale of a Mutual Fund are of 2 types – Long Term Capital Gains and Short Term Capital Gains. Tax on sale of Mutual Funds held Long Term/Short Term is mentioned below:-

  • Tax on Long Term Capital Gains: If the equity mutual fund is held for more than 1 year, the gains arising on the sale of the mutual fund are fully exempted from the levy of any capital gains tax. There is no maximum limit on the amount which can be claimed as an exemption on sale of mutual funds which have been held for more than 1 year.
  • Tax on Short Term Capital Gains: If the equity mutual fund is held for less than 1 year, the gains arising on the sale of mutual fund would be levied at a concessional rate of 15%. There is no maximum limit on the amount would be taxed at this concessional rate of 15% under Section 111A.

For a detailed read on tax on sale of Equity Mutual Funds, you may refer this article on Capital Gains Tax on Sale of Mutual Funds.