Mutual funds can be tax-efficient investment avenues that can help reduce your tax burden and at the same time increase your wealth. Income tax benefit - Investments made in tax-saving schemes up to Rs 1.5 lakh are eligible for deduction from taxable income under Section 80C of the Income Tax Act.   Lower lock-in period - In comparison to traditional investment avenues like PPF, NSC under section 80C of the Income tax Act, these funds have the shortest lock in period of 3 years.   Tax-free dividends/Capital gains - Dividends declared under the tax-saving schemes during the investment period are tax-free. The profits on the sale of these units are treated as long-term capital gains, and are not subject to tax.   Higher return potential – Tax-saving funds invest a large part of the fund in equity, which despite short-term volatility has the potential to build wealth over the long term.   WHO SHOULD INVEST?
  • Investors looking for wealth creation over the long term.
  • Investors looking for tax deductions under Section 80C.
  • Investors having a time horizon of 3 years or more.
   Additional Note on Dividend Stripping   The tax provisions now states that when a person buys any units within a period of three months before the record date, sells such units within nine months after such date, and then the dividend income on such units is exempt from tax. But the capital loss on such sale to the extent of the dividend income cannot be set off against other gains.   The notional loss caused by the dividend payment can be claimed as loss only if the units were bought three months before the record date or are held for at least nine months after dividend payment. "If the units are sold before 9 months, the loss will be disallowed under Sec 94(7) of the Income Tax Act."