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Guide to Tax Saving Investments: What you need to know

By Aayush Upadhyay

1st Apr 2022

4 mins read

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Mutual Funds are an incredibly popular investment avenue, especially in India, crediting to the benefits like expert management and attractive returns over time. Although these funds don’t have many hidden charges, they get taxed. This can significantly change how much money one sees at withdrawal.

In this blog, we focus on decoding taxes on Mutual Fund gains and a peek into minimising them. Let’s have a look!

Taxes on Mutual Funds

A Mutual Fund is an asset where multiple investors pool their money together, and the fund manager invests this money into different securities such as Stocks and Bonds.

When buying a Mutual Fund, the only factors affecting the taxation are when one decides to sell it (Time) and how profitable it was (Profits).

  • Profits and Loss: When one decides to redeem the fund units, there can be only two scenarios: Sell it at a higher price (Capital Gains) or Sell it at a lower price (a Loss).
  • Time: Depending upon when one decides to sell the Mutual Fund holdings, the tax rates vary
  • Equity Funds (Investments in stocks)
  • Less than a year: If you sell your units before one year of holding them, then your Capital Gains are considered Short-term and taxed at a rate of 15%.
  • After one year: If units are sold after a year of holding, then the capital gains are called Long-Term, and if the profits are above Rs 1 Lakh, they are taxed at 10%. Gains under Rs 1 lakh are entirely tax-free.
  • Debt Funds (invests in bonds)
  • Less than three years: The Short-Term gains made here are added to the taxable income, which attracts tax as per the income slab.
  • After three years: If holdings are sold after three years, the gains will be taxed at a flat rate of 20% after indexation (adjustment with current rates)

However, it is essential to note the following:

  • If you sell your units after 1 year and your gains are less than Rs 1 lakh, you can simply sell it right then, and your profits will be tax-free, but the next step will be to reinvest that amount into a Mutual Fund. This is known as Tax-Harvesting.
  • The other method is Tax-loss harvesting to take advantage of Capital loss which allows the total capital gains to be adjusted and reduce your tax liability. This will enable you to benefit from lows and use them to reduce your tax burden. The best part is that your capital losses can be carried forward for up to 8 years.

Now, let’s explore some direct tax saving options:

Section 80C Deductions

Investing in mutual funds helps you set your long term goals, but it can also provide income tax benefits with the help of Section 80C. An individual can claim deductions based on some investments or expenses, up to Rs 1,50,000.

  • Investments
  • ELSS Mutual Funds (Equity Linked Saving Scheme)
  • PPF (Public Provident Fund)
  • EPF (Employee Provident Fund)
  • NSC (National Savings Certificate)
  • Tax Saving Fixed Deposits
  • ULIP Scheme (Unit Linked Insurance Plan)
  • SCSS (Senior Citizens Savings Scheme)
  • Pension Fund
  • Sukanya Samriddhi Savings Scheme
  • Expenses
  • Education fees for up to 2 children
  • Home Loan repayment
  • Life Insurance premiums

With the help of all these provisions, you can claim deductions hence reducing your tax liability. We will go into more detail about each of these investment options in separate blog posts.

Other avenues can help you here.  

Other sections - 80D, 80EE

  • 80D: This pertains to deductions for medical needs: Medical insurance premiums, hospitals bills and any other preventive health check-ups up to Rs 50,000
  • 80EE: This applies to first-time home-buyers who can claim deductions up to Rs 50,000 for the interest amount on their home loan.

You might be calculating how much taxes you can save now, but wait! This is not all.

Other expenses that can save Taxes

  • Section 80GG: This allows individuals to claim deductions on their housing rents if they are not receiving any HRA from their employer. With this, you claim deductions up to Rs 60,000 every year.
  • Section 80G: This helps individuals claim deductions for the donations made for charity or relief.

That was a lot of sections. We hope you were taking note of all the money you can save in your income tax return this year. What next? Start saving money and taxes from now on, and we will start working on the second part of this blog to bring you more hacks to save taxes. See you in the next one.


Why do we need to pay Income tax in India?

Taxpayers are essential to the functioning of any country. Citizens' taxes are used for various activities that benefit both the nation and the citizens. As a result, taxpayers are essentially contributing to India's growth.

Can I get deductions of more than 1.5 Lakhs?

Yes, in addition to the deductions claimed with section 80C, with the help of other sections of the Income Tax act such as 80EE(Education Loan) and80D (Medical Expenditure), the total savings can be around Rs 2,00,000.

Who needs to pay Income tax?

There are mainly six types of taxpayers in India: Individuals, Hindu Undivided Family(HUF), Association of Persons(AOP), Body of Individuals (BOI), Firms and Companies. Each of these taxpayers needs to file Income Tax returns and pay taxes according to their tax slabs and other incomes.

How can I claim all these deductions in my ITR?

While filing your income tax, you must enter your deductions for every section; for example, section 80C will include ELSS, Life Insurance premium, etc. Section 80D will have to include all your medical expenditures.

Is it necessary to file an ITR if you do not fall in any tax brackets?

Filing an income tax return is optional if you have no tax liability due to your earnings and do not fall into any tax brackets. However, it is still recommended that you file your ITR to keep a record for future reference.

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