Mutual Funds and Tax Benefits: What Every Investor Should Know

New Delhi [India], February 19: Mutual funds are the one-stop investment solution for people looking to invest in stocks or bonds with the expertise of a fund manager. By paying the price of a single mutual fund unit, the investor gets an expert-curated portfolio of equity, debt, and other instruments. While mutual funds provide several advantages such as low cost, diversification, and professional management, there is certainly one major benefit that every investor should know.

There is one type of mutual fund that provides a direct benefit of saving taxes and helps in reducing taxable income. From the world of equity funds, ELSS funds come in the tax deduction framework of Section 80C of the Income Tax Act, 1961. So, let’s understand in detail the tax benefits of investing in ELSS funds and other MF tax benefits in general.

ELSS: Fund for Wealth Accumulation and Tax Savings

ELSS (Equity Linked Savings Scheme) is the only type of mutual fund that comes under the tax deduction benefits of Section 80C. Under the old tax regime, you can avail the tax deduction up to the investment amount of ₹1.5 lakhs in a financial year and save ₹46,800 in taxes in a year. You cannot claim this tax deduction on the investment amount of ELSS funds in the new tax regime.

According to the SEBI categorization rules, ELSS funds have to invest at least 80% of the accumulated funds into stocks, thereby providing the benefit of wealth creation over a long period. Also, this fund is subject to the lock-in period of 3 years and it means that you can’t redeem or sell the units before this period.

By opening a free demat account with SMC Global Securities, you can easily invest in ELSS funds either through SIP or lumpsum mode. There is no limit on how much you can invest in a fund, but you can claim the deduction up to the investment of ₹1.5 lakhs only in a financial year.

Reasons to Invest in ELSS Funds

Higher Returns: These mutual funds invest majorly in stocks spreading across different market caps (large-cap, mid-cap, or small-cap) and industries. The returns generated by the funds get compounded over a period of time, making them ideal for building wealth.
Minimal Lock-in Period: In all the Section 80C instruments, ELSS funds have a minimal lock-in period of 3 years. Other instruments such as PPF have a lock-in of 15 years while NSC has a lock-in of 5 years.
Professional Expertise: By parking your funds in ELSS funds, you are free from selecting and analyzing different stocks. The fund manager will create a diversified portfolio of stocks and also invest some of the corpus in fixed-income securities to balance out the risk.
Long-term Objectives: These funds are suitable for long-term objectives such as retirement planning, child education, and marriage. At the same time, it helps you save on taxes when your money is growing for your crucial years.
Ideal for First-time Investors: ELSS funds are ideal for first-time investors who are looking to start their investment journey but don’t have the right skills to create a portfolio. Along with investment opportunities, it serves the twin purpose of tax savings for newbie investors.

How to Save Taxes in ELSS Funds?

Here is a step-by-step guide on how you can claim tax deduction benefits of ELSS funds in the old regime.

Your annual income is ₹15 lakhs and you have invested a lump sum amount of ₹1.5 lakhs in an ELSS fund.
At the time of filing tax, you opted for the old regime which has a provision of Section 80C.
After the deduction of ₹1.5 lakhs of the investment amount in ELSS funds and ₹50,000 of the standard deduction, your taxable income will be reduced by ₹2 lakhs.
This means that you have to pay the tax on the income of ₹13 lakhs which is ₹2.10 lakhs in the old regime.

However, if you have not invested in ELSS funds, then your total taxable income will turn out to be ₹14.50 lakhs and your total tax liability will be ₹2.57 lakhs. Hence, you will directly save ₹46,800 in taxes by investing in ELSS funds.

Tax Benefits in Other Mutual Funds

Apart from ELSS funds, there are other mutual funds taxation rules on LTCG, STCG, and dividends which can help you plan your investments to save taxes.

LTCG on Equity Oriented Funds: Long-term capital gains (units redeemed after 12 months) derived from equity-oriented funds will be taxed at 12.5% only and only if the gains are more than ₹1.25 lakhs. This means that LTCG earnings from equity-oriented funds (with a minimum exposure of 65% in equities) are tax-free up to a specified limit.
Debt Funds Earnings: Regardless of the holding period, capital gains earned from debt funds will be added to your total income. So, if your total income after adding the capital gains is lower than the specified taxable income level, then you can save on taxes in debt funds as well.
Dividend Income: The dividend income of the mutual funds will face a 10% TDS deduction if the dividend is more than ₹10,000 in a financial year. This threshold limit was revised in the Union Budget 2025 which was earlier ₹5,000 in a financial year.

Conclusion

ELSS funds serve the dual purpose of wealth creation and tax savings. It directly helps in reducing the taxable income in the old regime, thereby reducing the final tax liability. Apart from high returns, these funds are also exposed to high risk as they invest the majority of the corpus in stocks. By analyzing past returns, expense ratio, and other ratios, you can select the right fund. You can also go through the financial blogs on SMC Global Securities to explore the list of top mutual funds and stocks to invest in now.

About the Author: I am Sheetal Goel, working as a content writer at SMC Global Securities. I hold 5+ years of experience in financial research and writing. As an Economics graduate and MBA (Finance), I possess the right skills to craft valuable blogs and make finance easy for readers.

Disclaimer: This article is only for informational purposes and does not intend to advise or recommend any sort of investment or platform.