Tax Benefits of Mutual Funds: How to Save More

Investing in mutual funds is not just a great way to grow your wealth—it’s also an excellent tool for tax planning. Whether you’re a seasoned investor or just starting out, understanding the tax benefits of mutual funds can help you save more and optimize your returns. In this blog, we’ll explore the tax advantages of mutual funds, how they work, and how you can make the most of them.

Why Tax Planning with Mutual Funds?

Taxes can eat into your investment returns, but mutual funds offer several tax-saving opportunities under the Income Tax Act, 1961. By leveraging these benefits, you can reduce your tax liability and increase your net returns.

Tax Benefits of Mutual Funds

1. Equity-Linked Savings Scheme (ELSS)

ELSS is one of the most popular tax-saving mutual funds, offering dual benefits of wealth creation and tax savings.

  • Tax Deduction: Investments in ELSS are eligible for a deduction of up to ₹1.5 lakhs under Section 80C.
  • Lock-in Period: 3 years (shortest among Section 80C options).
  • Returns: Historically, ELSS has delivered higher returns compared to other tax-saving instruments like PPF or FDs.

Example:
If you invest ₹1.5 lakhs in ELSS, you can save up to ₹46,800 in taxes (assuming a 31.2% tax slab).

2. Long-Term Capital Gains (LTCG) Tax on Equity Funds

Equity mutual funds held for more than 1 year qualify for Long-Term Capital Gains (LTCG) tax benefits.

  • Tax Rate: 12.5% on gains exceeding ₹1.25 lakh per financial year.
  • Indexation Benefit: Not applicable for equity funds.

Example:
If you earn ₹2 lakhs as LTCG from equity funds in a year, only ₹75 thousands will be taxed at 12.5%, i.e., ₹9375.

3. Short-Term Capital Gains (STCG) Tax on Equity Funds

Equity mutual funds held for less than 1 year are subject to Short-Term Capital Gains (STCG) tax.

  • Tax Rate: 20% on gains.

4. Tax Benefits of Debt Funds

Debt mutual funds held for more than 3 years qualify for Long-Term Capital Gains (LTCG) tax with indexation benefits.

  • Tax Rate: 20% after indexation.
  • Indexation Benefit: Adjusts the purchase price for inflation, reducing taxable gains.

Example:
If you invest ₹1 lakh in a debt fund and redeem it after 3 years for ₹1.5 lakhs, the indexed cost (adjusted for inflation) might be ₹1.2 lakhs. Your taxable gain would be ₹30,000, taxed at 20%, i.e., ₹6,000.

5. Dividend Distribution Tax (DDT) Removal

As of FY 2020-21, Dividend Distribution Tax (DDT) has been removed. Dividends from mutual funds are now taxed at the investor’s income tax slab rate.

How to Maximize Tax Savings with Mutual Funds

  1. Invest in ELSS for Section 80C Benefits:
    • Use ELSS to save up to ₹1.5 lakhs in taxes while earning market-linked returns.
  2. Hold Equity Funds for Long-Term:
    • Avoid STCG tax by holding equity funds for more than 1 year and benefit from LTCG tax rates.
  3. Use Debt Funds for Long-Term Goals:
    • Hold debt funds for more than 3 years to benefit from indexation and lower LTCG tax rates.
  4. Opt for Growth Option Over Dividend:
    • Growth options reinvest profits, allowing you to benefit from compounding and defer taxes until redemption.
  5. Plan Your Redemptions:
    • Spread out redemptions to keep LTCG below ₹1.25 lakh per year and avoid taxes.

Tax Implications of SIP, STP, and SWP

  1. SIP (Systematic Investment Plan):
    • Each SIP installment is treated as a separate investment for tax purposes.
    • LTCG applies if units are held for more than 1 year (equity funds) or 3 years (debt funds).
  2. STP (Systematic Transfer Plan):
    • Transfers from one fund to another are treated as redemptions and may attract capital gains tax.
  3. SWP (Systematic Withdrawal Plan):
    • Each withdrawal is treated as a redemption and taxed based on the holding period and fund type.

Example

Scenario:

  • An investor in the 31.2% tax slab invests ₹1.5 lakhs in ELSS and earns ₹2.5 lakhs as LTCG from equity funds in a year.

Tax Savings:

  • ELSS: Saves ₹46,800 under Section 80C.
  • LTCG: Pays 12.5% tax on ₹1.25 lakh (₹2.5 lakhs – ₹1.25 lakhs exemption), i.e., ₹15,625.

Net Benefit:
The investor saves ₹31,175 in taxes while earning market-linked returns.

Conclusion

Mutual funds are not just a tool for wealth creation—they’re also a powerful way to save on taxes. By understanding the tax benefits of mutual funds and planning your investments wisely, you can maximize your savings and achieve your financial goals faster.

At Adorn Solutions, we’re here to help you make informed investment decisions and optimize your tax savings. Whether you’re looking to invest in ELSS, equity funds, or debt funds, our experts will guide you every step of the way.

Ready to start your tax-saving journey? Contact us today!

Insurance: Individual vs. Family Health, which is Better?

Health insurance is no longer a luxury—it’s a necessity. With rising medical costs and the increasing prevalence of lifestyle diseases, having a health insurance plan is crucial for financial security. But when it comes to choosing between individual health insurance and family health insurance, many people find themselves confused. Which one is better? Which one suits your needs? In this blog, we’ll break down the differences, pros, and cons of both options to help you make an informed decision.

What is Individual Health Insurance?

Individual health insurance provides coverage for a single person. The policyholder pays a premium, and in return, the insurance company covers medical expenses as per the policy terms.

Key Features:

  • Coverage for one person.
  • Premiums are based on the individual’s age, medical history, and sum insured.
  • Ideal for young, single individuals or those without dependents.

What is Family Health Insurance?

Family health insurance, also known as a family floater plan, provides coverage for the entire family under a single policy. It typically covers the policyholder, spouse, children, and sometimes parents.

Key Features:

  • Coverage for multiple family members under one plan.
  • Premiums are based on the age of the oldest member and the total sum insured.
  • Ideal for families looking for comprehensive coverage at an affordable cost.

Individual vs. Family Health Insurance: Key Differences

AspectIndividual Health InsuranceFamily Health Insurance
CoverageCovers one personCovers multiple family members
PremiumBased on individual’s age and healthBased on oldest member’s age
Sum InsuredDedicated to one personShared among all members
FlexibilityCustomizable for individual needsCovers the entire family
Ideal ForSingles, young adultsFamilies with dependents

Pros and Cons of Individual Health Insurance

Pros:

  1. Tailored Coverage: The policy is customized to the individual’s needs.
  2. No Sharing of Sum Insured: The entire sum insured is available for one person.
  3. Lower Premiums for Young Individuals: Younger, healthier individuals pay lower premiums.

Cons:

  1. Limited Coverage: Only covers one person, so separate policies are needed for family members.
  2. Higher Overall Cost: Buying individual policies for each family member can be expensive.

Pros and Cons of Family Health Insurance

Pros:

  1. Cost-Effective: One policy covers the entire family, reducing overall premiums.
  2. Convenience: Single policy for all family members, making it easier to manage.
  3. Comprehensive Coverage: Protects the entire family under one plan.

Cons:

  1. Shared Sum Insured: The total coverage is shared among all members, which may be insufficient in case of multiple claims.
  2. Higher Premiums for Older Members: Premiums are based on the oldest member’s age, which can increase costs.

Which One is Better?

The choice between individual and family health insurance depends on your specific needs and circumstances.

Choose Individual Health Insurance If:

  • Single or have no dependents.
  • Dedicated coverage for yourself.
  • Specific health needs that require tailored coverage.

Choose Family Health Insurance If:

  • Dependents (spouse, children, or parents).
  • Cost-effective solution to cover the entire family.
  • Convenience of managing a single policy.

How to Maximize Your Health Insurance Benefits

  1. Assess Your Needs: Determine the coverage required for yourself and your family.
  2. Compare Plans: Look for policies with adequate sum insured, network hospitals, and claim settlement ratio.
  3. Add Riders: Enhance your coverage with add-ons like critical illness, maternity, or OPD cover.
  4. Review Regularly: Update your policy as your family grows or your needs change.

Example

Scenario:

  • A 35-year-old with a spouse and two children needs health insurance.

Option 1: Individual Health Insurance

  • Individual plans for each family member: ₹25,000 annually.
  • Total Premium: ₹1 lakh per year.

Option 2: Family Health Insurance

  • Family floater plan with ₹10 lakhs coverage: ₹35,000 annually.

Result:
The family floater plan is more cost-effective and provides adequate coverage for the entire family.

Conclusion

Both individual and family health insurance plans have their own advantages and limitations. While individual plans offer tailored coverage, family floater plans are more cost-effective and convenient for families. The right choice depends on your family structure, health needs, and budget.

At Adorn Solutions, we’re here to help you choose the best health insurance plan for your needs. Whether you’re looking for individual or family coverage, our experts will guide you every step of the way.

Ready to secure your family’s health? Contact us today.