How to claim tax benefits on mutual funds?

Mutual funds help generate capital appreciation with comparatively less risk than direct equity. Since you invest in funds that own several securities, your risk is diversified, and your portfolio is protected. Also, with decent returns, you can save taxes on your investments in mutual funds.

If you belong to the highest income tax bracket, investing in fixed deposits (FDs) and tax savings deposits isn’t the best option from a tax perspective. You must pay taxes yearly on your capital gains, taxed at prevailing rates depending on the tax slab. To avoid this, you can invest in mutual funds and receive professional fund management and tax savings.

ELSS (Equity Linked Savings Scheme), a type of mutual fund, is a great way to save taxes on your mutual fund investments under Section 80C of the Income Tax Act, 1961. The article below gives an insight into the tax benefits of mutual funds and how to claim them.

What is an ELSS fund?

Many investors invest in mutual funds for low-risk capital appreciation and tax benefits. ELSS is a diversified equity-oriented mutual fund that qualifies for tax exemption according to the Income Tax Act of 1961. However, these funds have a lock-in period of three years but can be invested for longer, depending on your financial requirements.

Tax benefits of mutual funds under Section 80C of the Income Tax Act

Section 80C of the Income Tax Act of 1961 allows individuals to claim tax benefits on numerous investments from their gross income. An investment in ELSS funds can provide you deductions of up to ₹1.5 lakhs per year. In addition, they can invest in other instruments per the IT Act regulations to maximise their tax benefits.

Why should you choose an ELSS fund?

There are several reasons to choose an ELSS fund for tax benefits compared to other instruments. The following are the common reasons to go for these funds:

• ELSS invests your money in the equity market, which can generate better returns than other funds and assets.
• The lock-in period for these funds is much lesser (three years) than NPS, NSC, fixed deposit etc.
• You get the flexibility of a lump sum investment or Systematic Investment Plan (SIP) for part investment.
• In an ELSS fund, you can also opt for a dividend scheme. It helps you get regular income during the lock-in period. Moreover, the dividend earned on these funds is tax-free.
• The amount paid during redemption, or the dividend received is not eligible for TDS. However, you must pay Securities Transaction Tax at 0.001% of the total redeemed value.

How to claim tax benefits on ELSS?

To claim tax benefits on ELSS or any investments in general, investors need to file their income tax returns for the specific year. The claims can be made under Section 80C, Income Tax Act of 1961. During claim filing, you must produce all documents and proof, and relevant forms of various investment categories must be filled out.

You can claim a tax deduction for a particular year only during that financial year. For instance, if you invest in a mutual fund in April 2023, you can claim a tax deduction during the financial year 2023-24. However, you declare your investment at the year’s beginning and end.

Tax savings is a primary goal for many investors, and mutual funds can be a suitable tool. ELSS investment is one of the best ways to save taxes from your gross income while enjoying decent capital appreciation.