If investing in equity MF for more than 1 year is exempted from tax,
Then why there are some MF which is under some category of Tax saving funds.
Please clarify
Hi @Muniz.Reza,
When you invest, assume 1 lakh in mutual funds, and if the funds grow to say 1.5 lacs, now if you decide to redeem this within one year you will have to pay taxes on the 50,000 you made as profit. In addition to that, the money that you invested may have come from salary, assume the person has an annual income of Rs.5,00,000( he falls in the 20%) tax bracket , if he has invested this in normal equity mutual funds as said above and makes a profit, he has to pay income tax on salary, i.e. at 20% of (5,00,000+50,000). I.e. ₹1,10,000 as tax for the year
Now if he had invested an amount of ₹1,00,000 in tax saver mutual funds ( also known as ELSS funds)
He can claim a tax exemption under section 80C of income tax act, this means out of his salary of Re.5,00,000, he declares an investment of ₹1lakh under 80C, so now his net income for the year is ₹4 lakhs, he falls into the 5% tax slab, so the taxes he will be liable to pay for that year will be 5% of 4,00,000 which is ₹20,000. This investment in tax saver funds will have a lockin period of 3 years, you can continue to hold it for more time than that. The beauty about ELSS funds is that, it is the option with the lowest lock-in period compared to all other tax savings instruments under section 80C.
Also when you redeem these funds you don’t have to pay any taxes on the gains.
Hope this helps.
Cheers,
Lindo
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