Taxes serve as the backbone of the economy of any nation and play a pivotal role in financing the activities of the government as well as public services. ITR or income Tax Filing stands as the fundamental obligation for all individuals.
Therefore, it is quite clear that taxes are an inevitable aspect of financial life, but one can secure a pathway for one’s tax liability optimisation with the help of strategic investments. Along with seeking an answer to the question- What is ITR?, this article will also try to explore the various tax benefits on mutual funds that may impact the financial decisions of an investor.
What is ITR?
ITR or Income Tax Return is actually a formal document that is required to be filled by businesses, individuals, as well as other entities for the purpose of reporting their income, calculating their annual tax liability and providing details of exemptions, deductions and credits which they are eligible for according to the respective country’s tax laws.
The main purpose of ITR filing is to secure compliance with tax regulations abd to collaborate in the assessment and tax collection by the government. By filling out an accurate ITR, taxpayers provide the government with a comprehensive overview of all the activities concerning their finances.
This, however, also helps the authorities in determining the appropriate tax amount refundable or owned. Thus, to sum up the meaning of ITR, it serves as a declaration of an entity or individual’s income and financial transactions for a particular financial year.
Tax Benefits Against Mutual Fund Investments:
Given below are the tax benefits that one may secure by investing in various types of mutual funds.
Table of Contents
Tax Benefit of Investing In Equity Mutual Funds Under Section 80C
A mutual fund that invests a large amount of money in the equity market is commonly referred to as Equity Mutual Funds. One is eligible to claim deductions against the investments made in these mutual funds. However, there is a limit for maximum deduction, which is Rs. 1,50,000 and can be claimed under section 80C. The investments that are most popular against which this deduction can be claimed are:
- PPF Account
- Tax Saving FD
- LIC Policy
- National Certificate Of Savings
- Home Loan Principal Repayment Amount
- Plans For Pension
Tax Reduction On Payment Of Dividend By Mutual Funds:
Several mutual funds pay regular dividends to the investors. This dividend, which the investors receive from the mutual funds, is exempted from tax liability. Therefore, the investor doesn’t need to pay any taxes on the dividends received from the mutual funds that pay dividends. Also, there exists no maximum limit on the total amount of exemption that an investor can claim on the received dividend from specific mutual funds.
Capital Gains Tax For Sale Of Equity Mutual Funds:
The primary determiner of the value of a mutual fund is NAV or Net Asset Value, which is subject to fluctuation on a regular basis depending on the mutual fund’s performance. If any investor intends to sell the units that they hold of a particular mutual fund, two kinds of gain may arise- Short Term Capital Gain And Long-Term Capital Gain. The tax implications of selling mutual funds after holding them for the long term as well as for the short term are explained below in detail:
Long-Term Capital Gains Tax:
If an investor holds an equity mutual fund for more than a year, the gains against the sale of the units of the mutual fund will be considered as long-term capital gains tax and will be taxed at 10% rate, on which 4% recess will be available. It is also essential to note that, capital gains on long term is tax deductible of up to one lakh rupees for a financial year. In other words, no capital gains tax would be imposed in such cases.
Short-Term Capital Gains Tax:
On the other hand, if any investor sells equity mutual fund units before the completion of one year, the gains secured against sales would be considered as short-term capital gains tax and will be taxed at the rate of 15% with an additional 4% recess during the financial year.
Thus, to conclude, mutual fund investment, especially investments in equity mutual funds, offers investors with considerable tax benefits that can help in reducing their tax liabilities significantly. It is by navigating the landscape of investments in mutual funds along with securing an awareness of the tax implications one may adopt tax-efficient financial decisions that will go along with their long-term goals.