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 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 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 - be it an Equity or Debt MF, are not taxable at all in your hands. In the case of Equity , dividends are not even subject to the Dividend Distribution Tax from the Fund’s side. This ensures your returns are not diluted by Tax.