Tax Benefits of Mutual Funds – Top 3 tax benefits on Mutual Funds

Manish Kothari
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Manish Kothari


A mutual fund is an investment alternative that primarily pools money and funds from the investors and invests it in specified securities on behalf of its investors. These can be broadly classified into three categories, namely Equity Mutual Funds, Debt Mutual Funds & Hybrid Mutual Funds.

As the name suggests, Equity mutual funds are those funds that invest the majority of the funds in equity securities whereas Debt mutual funds are funds that majorly invest in Fixed/Debt income earning alternatives. 

Mutual funds can be really beneficial while doing financial planning. But one more aspect which is equally important is tax planning as it plays an integral role in financial planning. If done right, investors can save a decent amount of money each year.

In this article, we are particularly going to discuss and understand the tax benefits of investing in Mutual Funds.


1. Income Tax benefit under Section 80C:

As we discussed, equity mutual funds invest a predominant part in equities i.e. the stock exchange. This ELSS (Equity Linked Saving Scheme) Funds purchase the shares either through IPO or through the stock exchange. The funds invested in these mutual funds are eligible to be claimed as deduction under section 80 C. Nevertheless, there is no limit for investing in these funds but the max amount of deduction that can be availed is Rs. 1,50,000 under Section 80 C for investing in these types of mutual funds. 

Investors must note that this deduction of Rs. 1.5 lacs is the cumulative deduction that is allowed in any financial year for investments in various specified alternatives. The most popular of these alternatives are:

  • Pension Plans
  • PPF Account
  • Life Insurance Policy
  • NSC
  • Tax Saving FD

2. Lower lock-in period:

Usually, equity funds are ideal for long-term investments and don’t possess any type of lock-in period. Nevertheless, ELSS funds have a 3-year lock-in period. So is investors opt for ELSS funds, they need to stay invested for at least 3 years in the funds. Nevertheless, this is a short tenure when compared to other tax-saving investment alternatives like the NSC which has a 5 year lock-in period, and PPF which has a 15 year lock-in period with partial withdrawal after the 7th year. 

3. Capital Gains Tax on redemption of mutual funds:

The value of a mutual fund is indicated by its Net Assets Value i.e. NAV. The NAV keeps fluctuating on daily basis based on the performance of the mutual fund. A mutual fund is always traded at its prevailing NAV. The gains arising from the redemption or sale of a fund are categorized into 2 parts, namely, LTCG and STCG. The taxation provisions are discussed below:

  • Tax on LTCG: If the mutual fund is held for more than 12 months, the gains arising on the redemption are exempted from the levy of any kind of capital gains tax up to Rs.1 lakh in a financial year. For the gains exceeding 1 lakh, 10% LTCG tax will be applicable.
  • Tax on STCG: If the mutual fund is help for less than 12 months, the gains arising on the redemption would be levied at a rate of 15%.


To get a crux of the above discussion, here is a comprehensive table for quick understanding.

 Individual Investors
Equity-based funds (Units held for more than 1 year)10% on gains above Rs.1 lakh in a financial year
Other than equity-based funds (Units held for more than 3 years)10% without indexation or 20% with indexation (Whichever is lower) + 4% cess
Equity-based funds (Units held for less than 1 year)15% + 4% cess
Other than equity-based funds (Units held for less than 3 years)30% + 4% cess

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