How to Claim Tax Benefits on Mutual Funds (ELSS)?

1. Relief for Small Investors: The tax-free limit on LTCG has been increased from Rs. 1 lakh to Rs. 1.25 lakh. Profits below Rs. 1.25 lakh remain tax-free. To maximize tax benefits, it is advisable to hold mutual fund investments for more than a year.

What are ELSS Funds?

ELSS or Equity Linked Savings Scheme is a type of diversified equity mutual fund that is qualified for tax exemption under Section 80C of the Income Tax Act. Most investors prefer to invest in this mutual fund instrument as it offers capital appreciation and tax benefits as well.

What are the Tax Benefits under Section 80C of the IT Act?

Under Section 80C of the Income Tax Act, the taxpayer can avail tax deductions from their gross total income. Individuals who have ELSS funds can avail deductions up to Rs1.5 lakh on the amount invested by them in the ELSS fund.

Taxpayer can make various other investments to avail deductions in the Section 80C of the IT Act. But, the taxpayer can also invest just in the ELSS fund and avail the benefits. Maximum amount that is allowed for deduction in the Section 80C of the IT Act is Rs.1.5 lakh in a year.

Why should a Taxpayer choose ELSS?

The following are the reasons why you must consider investing in ELSS fund:

1. The lock-in period is much lower when compared to PPF, NSC and bank fixed deposits.
2. ELSS invests in equity markets and investing in equity markets for a long term can give you better returns when compared to the returns offered from other assets.
3. You can choose the SIP investment and enhance your regular investing habit.
4. If you opt for a dividend scheme, then you can get income from your investment amount in the lock-in period.
5. The dividend earned from ELSS is tax-free.
6. TDS is not applicable on the dividend received or on the amount paid at the time of redemption.
7. There is also no tax on capital gains made from ELSS funds at the time of redemption. But Securities Transaction Tax will be charged at 0.001% on the total redemption value.
8. You get three options to choose from with ELSS funds. They are Growth option ELSS, Dividend option ELSS, Dividend reinvestment option.

When can Tax Benefits on ELSS Fund be claimed?

Tax deductions under Section 80C can be only claimed during a financial year, i.e. if an individual invests in an ELSS Fund in July 2015, deductions can be claimed for the financial year 2015-16. You can declare the investment at the beginning of a financial year itself or you can declare it at the end of the financial year.

How to claim Tax Benefits?

Taxpayers can claim the deductions under Section 80C of the IT Act when they file their income tax returns for a particular year. All supporting documents and relevant forms must be filled out and all information provided should be accurate and up-to-date.

Key Factors Influencing Mutual Fund Taxation in India

1. Type of Funds:

1. Mutual funds are categorized as equity or debt-oriented for tax purposes.

2. Capital Gains:

1. These are profits earned from selling a capital asset at a higher price than its purchase cost.

3. Dividend:

1. A portion of profits distributed by the mutual fund to its investors, not requiring the sale of the asset.

4. Holding Period:

1. The duration you hold the investment impacts the tax rate on capital gains. Longer holding periods reduce tax liability as per income tax regulations. 

How Profits are Generated in Mutual Funds

Capital Gains:

1. Profits realized when mutual fund units are sold at a higher value than their purchase cost. Tax on these gains is due upon redemption and is payable when filing income tax returns.

Dividends:

1. Distributed based on the fund's surplus and taxable upon payout. Post the Finance Act, 2020, dividends are taxed as per the investor's income tax slab. Additionally, a 10% TDS is deducted if dividends exceed ₹5,000 annually.

Dividend Taxation Changes

1. Before March 31, 2020, dividends were tax-free for investors, with fund houses deducting Dividend Distribution Tax (DDT). Now, dividends are fully taxable for investors and classified as "income from other sources."

Taxation on Mutual Fund Capital Gains

Capital Gains Tax Overview: The tax on mutual fund capital gains depends on the type of fund and the holding period.

Key Terms:

1. Long-Term Capital Gains (LTCG): Gains from assets held for a longer duration.

1. Short-Term Capital Gains (STCG): Gains from assets held for a shorter duration.

Holding Periods: 

Scheme Orientation:

1. Equity Funds: Must invest at least 65% in Indian equities or equity-related instruments.

1. Debt Funds: All other funds that do not meet the equity fund criteria.

1. Hybrid Funds: Taxation depends on whether they are equity or debt-oriented.

Taxation Details:

1. Equity Funds: If a mutual fund scheme invests at least 65% of its corpus in Indian equities or equity-related instruments, it is classified as equity-oriented for tax purposes. All other funds are considered debt-oriented.

1. The tax rate on profits from mutual funds held for over a year has risen from 10% to 12.5%. The tax rate on profits from mutual funds held for less than a year qualifies as short-term capital gain for which the tax has been increased from 15% to 20%.

By understanding these factors, investors can better manage their tax liabilities related to mutual fund investments.