Taxation on Mutual Funds in 2025

As we enter 2025, understanding the tax implications of mutual fund investments is crucial for maximizing returns and making informed financial decisions. This article will explore the various aspects of mutual fund taxation, including long-term and short-term capital gains, tax-saving options and the best ELSS funds for the year.

Understanding Capital Gains Tax on Mutual Funds

Capital gains tax on mutual funds is determined by the type of fund and the holding period of your investment. Let’s break down the key concepts:

Long-Term Capital Gains (LTCG)

For funds with equity allocation of more than 65% and held for more than 12 months, here is the LTCG that will apply:

– Gains up to Rs. 1,25,000 per financial year are tax-exempt.

– Gains exceeding Rs. 1,25,000 are taxed at 12.5% for units sold on or after July 23, 2024.

For funds with equity allocation less than 65%  and held for more than 24 months, here is the LTCG that will apply

– A tax rate of 12.5% is applicable without indexation benefits for gains on units sold on or after July 23, 2024.

Short-Term Capital Gains (STCG)

For funds with equity allocation of more than 65% and held for less than 12 months, STCG of 20% will apply on the gains made on the sale of units after July 23, 2024

For funds with equity allocation less than 65% and held for less than 24 months, STCG will be as per the investor’s income tax slab rate.

How to save Tax using Mutual Funds

It is true, you can save taxes by investing in Mutual Funds. You have to invest in Equity-Linked Savings Schemes (ELSS) for tax benefits under Section 80C of the Income Tax Act, 

Benefits of ELSS Funds:

• Save up to ₹46,800* in taxes: ELSS funds provide tax benefits under Section 80C of the Income Tax Act, 1961. Investors can claim a deduction of up to ₹1.5 lakh per financial year on their ELSS investments. This deduction can potentially lead to tax savings of up to ₹46,800, depending on the investor’s tax bracket
• Shortest lock-in period among other tax-saving instruments: ELSS funds have a lock-in period of only 3 years, which is the shortest among all tax-saving investment options. This is significantly shorter compared to other instruments like Public Provident Fund (PPF) with a 15-year lock-in or tax-saving fixed deposits with a 5-year lock-in. The shorter lock-in period provides investors with greater flexibility and liquidity.
• Potentially better returns: As ELSS funds invest primarily in equity markets, they have the potential to generate higher returns compared to other tax-saving options like PPF or fixed deposits. Historically, ELSS funds have provided average returns of around 10-12% over the long term. The equity exposure allows investors to benefit from market growth and the power of compounding, potentially leading to better wealth creation over time.

Top ELSS Funds for 2025

Based on consistency, here are some ELSS funds that you can consider:

• SBI Long Term Equity Fund
  • Fund Management Team: Dinesh Balachandran
  • Minimum Investment: ₹5000 for Lump sum
  • Fund Size: ₹27,791.08 Crores 
  • Launch Date: March 31, 1993
  • Performance:

Past performance is not an indication of future results. All data as of December 31, 2024

• HDFC ELSS Taxsaver Fund
  • Fund Management Team: Roshi Jain, Dhruv Muchhal
  • Minimum Investment: ₹500 for Lump sum
  • Fund Size: ₹15,728.87 Crores 
  • Launch Date: March 31, 1996
  • Performance:

Past performance is not an indication of future results. All data as of December 31, 2024

• Parag Parikh ELSS Tax Saver Fund
  • Fund Management Team: Raunak Onkar, Rajeev Thakkar, Raj Mehta, Rukun Tarachandani, Mansi Kariya
  • Minimum Investment: ₹500 for Lump sum
  • Fund Size: ₹4,506.61 Crores 
  • Launch Date: July 24, 2019
  • Performance:

Past performance is not an indication of future results. All data as of December 31, 2024

As mutual fund taxation rules continue to evolve, staying informed is key to making sound investment decisions. ELSS funds remain an attractive option for tax-saving, offering the potential for high returns along with tax benefits. However, always consider your financial goals and risk appetite when choosing investments.