There is no doubt that Equity has the best potential for returns. The government wants you to bene?t from these superior returns. This is why Taxes on Equity-based products like Equity Funds are low. After holding for a year, Equity and Equity Funds are not eligible for any Tax including Capital Gains Tax.
Equity-LINKED SAVINGS SCHEMES:
You can reduce your taxable income by ` 1.5 lakh by investing in certain Equity MFs under the Equity Linked Savings Schemes. So if you fall in the 30% Tax bracket, you can save up to ` 45,000 through ELSS schemes.
RAJIV GANDHI Equity SAVINGS SCHEME:
If you are a ?rst-time Equity investor falling in the 10/20% Tax bracket, you can also opt for RGESS. Through this, you can invest in Equity Funds or even Equity directly. Any investment up to ` 50,000 can help reduce your taxable income.
Debt FUNDS OVER FDs:
Even Debt Funds are Tax-ef?cient, especially when compared to Fixed Deposits. Any income you get from Debt Funds after holding for three years is considered as Long-Term Capital Gains unlike for FDs. This is eligible for indexation, which reduces your Tax outgo by taking into consideration - In?ation.
NO TAX DEDUCTED AT SOURCE:
Neither Equity nor Debt MFs are eligible for Tax Deducted at Source (TDS). Your interest payments from Fixed Deposits, however, attract TDS. This further eats into your FD returns. A 9% return from FDs fall to around 6% once you take into consideration Taxes. This makes it one of the least Tax-ef?cient options
DIVIDEND DISTRIBUTION TAX:
Any dividends you receive from MFs - be it an Equity or Debt MF, are not taxable at all in your hands. In the case of Equity MFs, dividends are not even subject to the Dividend Distribution Tax from the Fund’s side. This ensures your returns are not diluted by Tax.