Taxes are an essential aspect of the growth of any country. It helps the government build the infrastructure and the technology for a quality living experience.
As a responsible citizen, it is your duty to ensure that you pay the right amount of tax.
But there are certain situations in which you deserve a tax break. The government understands that and gives you enough options for you to apply for a tax break. If you are looking for investment options with a tax break, ELSS and gold mutual funds are two options that you could consider. Let us learn more about them.
What are ELSS mutual funds?
ELSS funds are a type of mutual fund that invests primarily in equities. It can be called a type of equity mutual fund, but the main difference here is the tax-saver part. They come under the section 80C of the income tax act, and hence, you can save up to Rs.1.5 lakh towards your contribution to the fund,
Another difference here is the lock-in period. While other equity funds need not have a lock-in period, ELSS comes with a lock-in period of three years. But at the same time, ELSS’s lock-in period is among the lowest among other section 80C instruments.
But ELSS’s tax benefits don’t end there. Since ELSS has a lock-in period, you can only withdraw the fund after at least three years. This means your returns will be considered long-term capital gains. Here, returns up to Rs.1 lakh are tax-exempt, and the rest is taxed at a flat 10%. This is much more affordable compared to short-term capital gains of a flat 20%.
Hence, ELSS becomes an ideal option to get the advantage of the growth of the stock markets while savings some taxes as well.
What are Gold mutual funds?
Gold funds are mutual funds that invest in different forms of gold. Such a fund will invest in gold by investing in gold ETFs and other reserves of gold. Here, a gold mutual fund will aim at creating wealth by making use of the growth of gold as a commodity. It gives you the ability to reap benefits similar to that of purchasing physical gold, but without the hassle of charges that could come with it. Additionally, in the case of gold funds, experienced fund managers could ensure you get the best out of your investment.
Taxation on gold mutual funds
Most gold mutual funds are taxedsimilar to how physical gold is taxed.
If you are selling gold in your individual capacity, you are subject to pay a tax rate of 20% plus a 4% cess on long-term capital gains. Your capital gains are considered long-term when you sell the gold after three years of purchasing.
Short-term gains are included in your income and taxed accordingly.
If your fund holds ETFs in your portfolio, then one ETF unit is considered to be one gram of gold and taxed accordingly.
But even though they are taxed similarly, investing in gold bonds has some advantages over holding gold physically.
The main advantage here is that it eliminates storage issues. Physically strong gold may prove to be dangerous even sometimes. But virtual gold will sit safely in your portfolio.
Also, you don’t need to have a demat account to invest in gold funds, making it a bit easier as well.
Both ETFs and gold mutual funds are good investment options. One thing that can help you choose between the two is understanding your goals and risk appetite. That information may help you plan your investments accordingly and help you with a decision in this scenario.