Equity Mutual Fund: Why It is The Most Tax-Friendly Investment?

Written on Friday, February 24, 2017
By Mitali Sharma

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How to save tax? As taxpayers, we all look for ways to save our income from the fangs of taxes as much as we can. Thus, while choosing an investment product, investors do check-out its tax-saving capability as well. An investor's goal is to choose an investment product with minimum tax rate and decent potential of wealth creation. In this regards, Financial Budget plays a crucial role as it announces the tax rate ofvarious investment products for a financial year.


Before the announcement of Budget' 2017, Prime Minister, in one of his speech, commented "To some extent, the low contribution of taxes may also be because of the structure of our tax laws. Low or zero tax rate is given to certain types of financial income."


Investors didn't not take much time to relate this remark to Equity funds and following this, there was a fear that the long-term capital gains (LTCG) of Equity Mutual Funds will not remain tax-free. Also, some were interpreting that the holding period for the long-term capital gains in Equity will increase from the existing one year. Just the way, Budget 2016 had increased the holding period for long-term bond funds from one to three years.

However, the good news is that the Budget 2017 announcement put all these fears to rest as no change in long-term capital gains tax was announced. As a result, equity-based mutual funds continue to rule as one of the most tax-friendly investments with the potential of wealth creation.

Following are some of the popular investment products preferred by investors in India.


Short Term Vs Long Term

Source: http://economictimes.indiatimes.com

The table shows that Equity Funds and Debt-Bonds have the shortest holding period, i.e 1 year only. It means, for Equity, if the investment is held for less than 1 year, then the capital gains will be charged with a tax rate of 15% and in case of Debt-Bonds, it will be taxed at marginal rate.

However, investors looking for long term investments are more concerned about tax rate in long term. In that scenario, Equity is the most tax-friendly investment option because it is the only product with no tax levy on its capital gains post the holding period. Other investment products have higher holding periods and even their capital gains tax rate are high

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