How can Companies Save Tax through Mutual Fund Investments

How do you save taxes through mutual fund investment? For individual investors, there are plenty of answers but can companies save taxes?

Corporates, businesses, companies, did you know?

You can save on taxes and generate higher returns on your investment. This means that, if you are investing in financial instruments such as mutual funds, you can collect exemptions and reduce your tax liability.

Table of Contents-

Investing in Mutual Funds to Save Tax
Importance of investing in mutual funds to save tax
Tax exemption from dividends
Indexation benefits
How does investing in mutual funds to save tax works?
What benefits can be accessed through Tax Saving Mutual Fund?
Final words

Investing in Mutual Funds to Save Tax

A special characteristic of the tax-saving mutual funds is that investments made in such saving funds are entitled to tax benefits under section 80C of the Indian Income Tax Act, 1961. Most of the joint tax-saving funds are ELSS programs and make investments in a growth-focused market. Equity-linked savings schemes (ELSS) are expanded equity mutual funds having two distinctive characteristics –

the amount of investment in them enjoys tax benefit under Section 80C of the Income Tax Act, 1961, which reaches the limit of Rs 1.5 lakh per year and,
the investment has a lock-in period of 3 years.

Every mutual fund company provides for them and often uses the term tax savings in its name to outshine it from their other mutual fund programs. The return on ELSS is not fixed and not guaranteed but depends on the performance of the equity market.

Revenue from a mutual fund can be divided into two categories:

Dividends and
Appreciation

Mutual fund plans fall into two categories for tax purposes. In the first division, all equity-based programs fall and rest into the second division. Someone looking for regular income prefers dividends while the one who requires to save for the long-term prefers a growth option.

Importance of investing in mutual funds to save tax

Based on the market exposure and capitalization of the industry, after reviewing long-term consistency, one may variegate among ELSS schemes. After the end of the lock-in period, one can continue with an ELSS investment similar to any open mutual fund scheme. However, scrutinize its performance by comparing it to its benchmark before doing so. Investing in ELSS has benefits including saving for the long-term, saving taxes and enjoying the tax-exempt income.

Tax exemption from dividends

Some programs invest in companies that pay dividends and offer regular payments. The dividend amount earned is taxed individually. This may be either withdrawn from time to time, or it may be reinvested. The total dividend revenue amounts to Rs. 5,000 per year tax-exempt. Therefore, if you have to choose one between pay-out or dividend reinvestment, it may be more helpful from a tax perspective to choose dividend pay-out.

Indexation benefits

Indexation benefits play a major role when investing in long-term debt. This is not eligible for equity-focused funds. Over time, interest rates on investments are partly due to monetary gain or interest. It is also due to the effects of inflation. Inflation gives you a distorted picture of how your investment has grown.

Indexation removes the effect of inflation before calculating your net profit margin. While your investment is likely to grow by Rs. 2 lakhs, you will pay a tax of Rs. 1.5 lakh. Therefore, the benefits of an index on long-term investments effectively reduce your tax liability.

How does investing in mutual funds to save tax works?

When an investor invests in a mutual fund, the investment is added to the pool. The portfolio corpus of the fund is then invested in the equity market in such a way that even if one investment has a loss, another investment can balance losses. If the investment is made in the form of SIP then the closing period for each installment is 3 years. For example, if the first investment is made on 10 March 2021 and the second on 1 April 2021 then on 10 March 2024 the first installments will be opened. But the second installment will remain closed until 1 April 2024.

When it comes to reclaiming fund units, investors can only use open units at the current NAV (Net Asset Value) price. NAV units are the amount that an investor receives per unit when redeemed. However, to withdraw, you will need to know the number of units available under the program and submit an application form to a mutual fund provider. They will add value to your account as soon as it is processed.

What benefits can be accessed through Tax Saving Mutual Fund?

The funds are professionally managed by fund managers having expertise in markets. Therefore, investors who do not have market knowledge can also invest in these funds.
These investments can be made throughout the year as they are open-ended.
Investments in mutual funds are qualified for tax benefits of up to Rs.1.5 lakh.
Investments can be made in these schemes as a way to plan to manage future expenses.
Long-term capital gains under these programs are tax-exempted.
It enables the investors to invest monthly through SIPs (Systematic Investment Plan) thus eliminating the need to invest at the same time.
If not withdrawn, it will continue to grow to a good amount.
The portfolios are kept diversified to minimize the risk of significant losses.
Although you may not be able to withdraw the principal amount, you may be able to withdraw the earned shares, even during the lock-in tenure.
While some investment options come with a lock period of 6 to 15 years, these include a lock-in period of only 3 years.

Final words

Investing in mutual funds to save tax provides for earning a high return on equity exposure. Although the refunds are sufficient, the tax return is only Rs.1.5 lakhs under section 80C. Investors can still delay investments until the funds are performing well. Investors can also allocate these investments to their long-term goals. Tax savings provide a decent return on investment, which many investors consider to be a huge profit. Additionally, to save taxes, one can consider the mutual fund for investing.