Investors often seek tax-saving ELSS mutual funds to take advantage of the IT Act's general deduction of up to Rs. 1.5 lakh per year on these plans. Top mutual funds in India offer ELSS schemes to individual taxpayers. These equity-linked savings schemes offer two major benefits: tax savings and capital appreciation to achieve life goals.
Mutual funds, on the other hand, are also taxed. The taxes are levied on:
- Dividends
- Earnings or Gains
- Capital gain taxes (payable when mutual funds are sold by investors)
It implies a policyholder has to pay taxes on the mutual funds he has invested in. However, to reduce taxes on mutual funds an investor has to follow the following tips.
5 Tips to Reduce Taxes on Mutual Funds
An investor can lower his tax burden and maximize the profits by considering the tips given below.
Invest for the Long-Term
No market participant can predict equity market volatility. As a result, to weather the storm of lower market returns, it is best to invest in mutual funds with a long-term outlook. Furthermore, the rate at which the gains are taxed is determined by the holding period. It is critical to realize that long-term capital gains (LTCG) of more than Rs 1 lakh on the sale of equity fund units are taxable at a 10% rate.
Check the Fundamentals
Before investing, it is critical to examine the fundamentals of the tax savings ELSS funds as well as their past performance. This is because the price movement of underlying securities is directly proportional to valuations. A poorly managed fund with low valuations or a good fund with extraordinarily high valuations is both avoidable. Study the fundamentals as future tax liability can be minimized by reducing fear trades and volatility.
Do Not Try to Time the Markets
Always invest in the market with both short-term and long-term objectives in mind. There is no such thing as perfect timing when it comes to allocating resources to mutual funds. Moreover, timing the markets can increase your tax burden in future.
Know the Risks
The tax saving ELSS funds allocate more than 65% of assets in equities and related instruments. These funds not only offer tax exemptions but also can create wealth in the long term for policyholders. The returns can be higher than the other tax-saving financial instruments available. Hence, you must invest in the mutual funds only after understanding the risks involved. Moreover, these tax savings funds have a mandatory three-year lock-in period. So, invest in funds with a long-term perspective.
Start Investing Early
Investing in an ELSS fund via SIP from your monthly contributions keeps policyholders disciplined in their tax planning. It also ensures maximum tax savings and long-term wealth creation owing to the power of compounding. Furthermore, investing in tax savings ELSS early provides several other benefits.
An investor wishing to buy mutual funds for tax benefits can do so by investing in ELSS funds offered by top mutual funds in India. Furthermore, by following the above-mentioned guidelines, a policyholder might lower his or her tax burden.
