The tax-saving exercise must be completed before March 31, 2022, to avoid penalties. Section 80C of the Income-tax Act, 1961 provides a deduction for new investments made in selected products during the current fiscal year.
This date is critical for taxpayers who have chosen to remain in the old/existing tax system for tax-saving. There is, however, a way to tax-saving if you have invested in equities mutual funds/equity shares in the past and are short on funds this year.
LONG TERM CAPITAL GAINS
Long-term capital gains (LTCG) on equities mutual funds and equity shares are now exempt up to Rs 1 lakh in a financial year under existing income tax legislation. In the current financial year, LTCG is exempt up to Rs 1 lakh if you have invested in equities shares and equity mutual funds in the previous financial year and have now withdrawn the money.
To qualify as long-term capital gains (LTCG), equity shares and equity mutual funds must be held for at least one year. If the holding period is less than one year, the profits will be taxed at 15%. The units that have been in service for more than a year must be withdrawn.
RSM India’s founder, Dr Suresh Surana, has this to say about the firm’s services: “Section 112A of the Income Tax Act imposes a 10 percent tax on long-term capital gains exceeding Rs. 1 lakh obtained from shares or mutual funds invested in equities. This means that a threshold exemption of Rs. 1 lakh is available for long-term profits, which means that all gains up to Rs. 1 lakh are exempt from tax.”
By taking advantage of the Rs 1 lakh yearly LTCG exemption, this tax-free withdrawal increases total tax savings. Your new equity investment would be eligible for this Rs 1 lakh exemption if you remove it more than a year after making it.
You may use the money from the equity mutual funds/equity shares that you just withdrawn to make a new ELSS investment for tax purposes. Additional information from Surana: “Furthermore, Section 80C under Chapter VI-A provides for a deduction with respect to investment in T Act; the deduction under Chapter VI-A shall be allowed from the gross total income, as reduced by such capital gains, in accordance with Section 112A (5) of the IT Act,” he says.
UNDER THE CURRENT GUIDELINES
Under present tax regulations, it is perfectly legal for you to churn your investments to reduce your tax burden. There is a maximum of Rs. 1.5 lakh that may be deducted under Section 80C, thus the profits from the sale of equity mutual funds can be used to make investments in ELSS mutual funds, which are eligible for deduction u/s 80C, according to Surana.
ELSS funds that have finished their lock-in period of three years may also be used for withdrawals from equity mutual funds that are more than a year old. Investing in ELSS mutual funds for tax savings in the current fiscal year may be done in the same way as investing in equity shares in the past.
ITR filing website CEO Abhishek Soni said, “In order to claim a deduction under section 80C, you must make investments in the specified channels throughout the financial year. Also, if you make new investments from the profits of selling ELSS mutual funds, you may claim the deduction.”
As Ashwin Karmarkar, a financial adviser at Vintage Finvest, puts it: “Section 80C of the Income Tax Act allows a deduction of up to Rs 1.5 lakh for ELSS mutual funds purchased using redeemed money. It’s possible to claim this deduction if you choose the previous tax system for the current financial year.”
“Investing in ELSS mutual funds not only allows you to reduce tax, but also assists in achieving inflation-beating returns,” Karmarkar explains. For three-year and five-year mutual funds, the ELSS mutual fund category average returns are 15.35 percent and 13.05 percent correspondingly.
Section 80C, 80D, and other typical tax deductions cannot be used to long- or short-term capital gains, respectively. You can’t avoid tax if your primary source of income is from capital gains. If, on the other hand, your only source of income is a wage, this may be a viable option if you lack the resources to make tax-saving investments.
Published By: JAINAM SHETH
Edited By : KRITIKA KASHYAP
