Smart Investment- Unlock The Power Of Best Tax-Saving Mutual Funds

Among many popular options to create a perfect investment portfolio, it is somewhat liable that you might not save taxes while you might get a lower return rate. Other potential options like the Public Provident Fund (PPF) in India have also been evaluated, but the problem lies in the minimal length of the lock-in period.

This questions the need for a legally viable investment option that could provide a higher return rate, while saving on taxes! So, here is a complete guide on how you can save smart with the power of the best tax-saving mutual funds, on Artikel Voyage…!

Meanwhile, not all options fit the category, the mutual funds option ahead of its popularity has been proven to fit a good investment category along with higher return rate and tax savings.

This smart plan accounts for some basic term understanding, like ELSS, which stands for Equity Linked Savings Scheme, which is another term used for mutual funds. To understand the backlinks of mutual funds, Section 80C of the Income Tax Act (ICT), 1961 has to be inspected. 

All about Section 80C of the Income Tax Act, 1961

Section 80C of the ICT 1961 states that a deduction or a tax exemption must be applied to popular investment options like Provident Fund (PF) contributions, life insurance premiums, payment of equity shares, along a widespread choice of mutual funds (Indian Kanoon, 2006).

Mutual funds under section 80C states that tax benefits of mutual funds are only valid for earning individuals, while they can claim around ₹1.5 Lakhs from the gross total income on an annual basis (Hdfc bank, 2020).

On the other hand, it has been made clear that this validation is only limited to individuals and not allowed for businesses, organizations, companies, or partnerships. Other investment options for tax deductions like provident funds and life insurance are also a part of this policy, but they are not the best options because of their long lock-in period. 

Why is Mutual Funds ‘THE BEST Option’?

After it is known that mutual funds qualify for tax exemptions according to the ICT

Section 80C, an individual can save ₹1.5 lakh in a financial year. Mutual funds qualify as one of the best investment options for tax deduction because it has an option to redeem or claim the invested amount within a shorter lock-in period of 3 years, comparable to other possible options.

While other options would potentially lead to a lock-in period of 5 to 15 years, mutual funds have been considered one of the best options short-term options for growing wealth gradually along with claiming a tax refund of ₹1.5 lakhs (Surana, 2024). 

Is There a Potential Risk for Long-term Gains?

The tax returns from mutual funds under section 80C are known as Long-Term Capital Gains (LTCG). The potential risk may arise in terms of LTCG that align when the gains exceed ₹1 lakh annually. 

• In simple words, if a person has invested in a mutual fund, the capital increments are categorized according to the holding time of the asset. If the asset is being held for one year in the short term, it could be accounted for in a short-term capital gain (BoyteWhite, 2019). 

• Meanwhile, if the asset is held for 3 years, it is reported for long-term capital gains (Boyte-White, 2019). Long-term capital gains account for a potential risk because if the claim is more than ₹1 lakh annually, it might be taxed at 10% (Groww, 2020).

In order to achieve the following tax benefits of mutual funds, the individual needs to keep the claim or withdrawal below ₹1 lakh every financial year. 

Steps to opt for mutual funds while saving taxes and getting better returns

After analysis of investment options for a tax deduction in a financial year, some steps can be followed by individuals to plan accordingly while gaining capital and saving taxes as a whole. 

• Meanwhile, there are many options under mutual funds according to the ICT, it is necessary to select a considerable Equity Linked Savings Scheme (ELSS) to save tax and account growth opportunities.

• Before taking steps, it is important for investors to understand the ICT, tax deduction under section 80C, along with short-term and long-term lock-in periods for higher tax returns.

• After getting hands-on knowledge of basic terms, then it is important for the investor to analyze the average interest, shorter lock-in period, and the risk it might take while calculating long-term capital gains.

• In order to reduce long-term capital gain risk, it is important to plan tax redemption rapidly on an annual basis, while asking for a tax deduction while filing the Income Tax Return (ITR).

While keeping these strategies in mind, an individual can make sure that they receive a tax deduction while opting for popular investment options like mutual funds, where they can reduce the risk with cautious planning and expect better returns.  

Reference list

• Boyte-White, C. (2019). Long-Term vs. Short-Term Capital Gains Rates—Which Is More Favorable? Investopedia. https://www.investopedia.com/articles/personalfinance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp  

• Groww. (2020). Long-Term Capital Gains Tax (LTCG) - Exemption and Saving Tax on LTCG. Groww. https://groww.in/p/long-term-capital-gains-tax  

• Hdfc bank. (2020). How Can Mutual Fund Deduction Save Income Tax? | HDFC Bank. Hdfcbank.com. https://www.hdfcbank.com/personal/resources/learningcentre/invest/how-to-save-tax-with-mutual-funds

• Indian Kanoon. (2006). Section 80C in The Income Tax Act, 1961. Indian Kanoon. https://indiankanoon.org/doc/1900597/   

• Surana, E. (2024, June 10). Section 80 Deduction: Income Tax Deductions under Section

• 80C, 80CCD, 80CCC, 80D. Cleartax. In. https://cleartax.in/s/80c-80-deductions