How to Save Taxes on Mutual Fund Profits in India
In India, the profits you make from mutual funds don’t come tax-free—they’re treated as capital gains. But with some smart planning, you can cut down your tax bill while still building wealth.
One of the most popular options is Equity Linked Savings Schemes (ELSS). These funds not only help you grow your money but also allow you to claim deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act. That’s why ELSS is often seen as a two-in-one option—tax saving plus wealth creation.
For other types of equity and debt mutual funds, the tax you pay depends mainly on how long you stay invested.
- Equity funds: If you hold them for more than a year, profits above ₹1 lakh in a financial year are taxed at 10% (long-term capital gains or LTCG). If you sell within a year, short-term capital gains (STCG) are taxed at 15%.
- Debt funds: The rules are different here. Long-term gains get indexation benefits (which adjusts your purchase price for inflation), often reducing the actual tax you pay. Short-term gains are added to your income and taxed as per your slab.
So, knowing these rules and timing your investments wisely can make a big difference in what you take home after taxes.
Practical Strategies for Tax Savings
Here are some simple yet effective ways to manage taxes on your mutual fund profits:
- Use the LTCG exemption smartly
Example: If you made a profit of ₹1.25 lakh, only ₹25,000 will be taxed at 10% since the first ₹1 lakh is tax-free. - Try a Systematic Withdrawal Plan (SWP)
Instead of redeeming in one go, you can withdraw, say, ₹10,000–₹10,500 monthly. This spreads out your withdrawals and often reduces tax impact. - Do tax-loss harvesting
If some funds are not performing well, you can sell them to book a loss and offset it against your gains—helping lower your taxable amount. - Time your exits strategically
Simply holding equity funds for more than a year makes a huge difference, as it qualifies you for the lower LTCG tax instead of the higher STCG rate.
