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How to pay less tax with the help of mutual fund investment?

How to pay less tax with the help of mutual fund investment?

Taxes take a sizable portion of our earnings. We all take maximum efforts to reduce the tax deduction. Even though it may look like a tedious process, there are several investment options that can certainly help you pay less tax. The investment options like mutual fund offer a variety of investment tools to save tax. An attentive investor should look after these options to save as much as possible. So without further ado, let us see different options in the mutual fund for tax saving.

  • Tax saving with ELSS

Equity-linked saving scheme or commonly known as ELSS is a preferredmutual fund investment options for tax-saving. It qualifies for tax exemptions under the Indian Income Tax Act, Section 80C. Under this act, the investment made up to INR 1.5 lakh in a year will be liable for tax exemption. This deduction can be claimed in a financial year only. Furthermore, ELSS can enjoy the benefits coming under Exempt, Exempt, Exempt (EEE) category). To put in simple words, you get tax benefits on ELSS, you don’t have to pay any tax on the dividends and there will be no capital gain when you redeem the funds.  

  • Tax-free dividends

The dividends you get on mutual funds are basically tax-free. Especially, when you invest in equity funds, the dividends are considered tax-free. These dividends will tax-free no matter when you receive it. It is another excellent option to save tax.

  • Invest in Debt Funds

Investing in debt is another good clever option to save tax. Any investment in debt funds held for more than three years is termed as a long-term investment. Currently, the long-term investment in debt fund is taxed at 20%. It should be noted that the investors will get the benefit of indexation on the original investment. It means their original investment is adjusted as per the inflation and it is taxed accordingly. As the cost of the original investment goes up after factoring, taxes become as good as insignificant.

  • Diversification of portfolio

To gain the maximum tax benefits, invest 65 percent of the fund in equity funds or equity-related instruments. It will be termed as a balanced term as its 65% of the investment goes into equities for tax saving purpose. As the portfolio is diversified, there will less risk and you can save major tax deduction.

  • Capital gain on Equity funds

Any capital gain on equity funds held for more than 12 months is termed as long-term capital gain. There is no tax on long-term capital gain on equity funds, so make sure you hold the capital gain for more than 12 months.

Tax savings on a mutual fund is very much possible. With the help of these tax saving options, one can save tax. Besides, these options are quite convenient so you won’t have trouble opting for them.

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