Income tax slabs: How will mutual funds help you to save tax

Imagine you are planning to buy a house in a couple of years, but the rising cost of living has burdened your savings. Moreover, your growing income has pushed you into a higher tax bracket, thus increasing your tax liability. In this situation, how can you ensure that your financial plan enables you to own your dream home in the desired time frame?

A suitable option is to use smart investment strategies that optimise the tax you must pay to the government every year. Mutual funds, particularly tax-saving categories, offer effective ways to minimise your tax outgo and speed up your investment journey.

In this article, we will study the various income tax slabs and rates in India and understand how mutual funds can help you save taxes.

• Table of contents

• Income tax slabs and rates
• Mutual funds can help save taxes
• Limiting tax outflow through the ELSS mutual fund route

Income tax slabs and rates

Taxation rates vary based on the annual income. Low earners are taxed at a lower rate while high earners are taxed at a higher rate. The income tax slabs were overhauled in the 2025 Union Budget for the new regime. These will be implemented if cleared by both houses of Parliament and upon receiving the President’s assent. Here are the existing and proposed tax slabs under the new regime.

EXISTING SLABS (FY’25)		PROPOSED* SLABS FOR (FY’26)
Annual Income (Rs.)	Tax Rate	Annual Income (Rs.)	Tax Rate
0 - 3 lakh	NIL	0 - 4 lakh	NIL
3 - 7 lakh	5%	4 - 8 lakh	5%
7 - 10 lakh	10%	8 - 12 lakh	10%
10 - 12 lakh	15%	12 - 16 lakh	15%
12 - 15 lakh	20%	16 - 20 lakh	20%
Above 15 lakh	30%	20 - 24 lakh	25%
--	--	24 lakh and above	30%

Note: the 2025 budget has also proposed increasing tax rebate up to Rs 50,000 for annual incomes of up to Rs. 12 lakh. Currently, the rebate limit is Rs. 25,000 and can be claimed by those earning up to Rs. 7 lakh annually.

Income Tax Slabs for FY 2024-25 (AY 2025-26) Under the Old Regime

Individuals aged below 60 years & HUF

Income slabs	Tax rate
Up to Rs. 2.5 lakh	NIL
Rs. 2.5 – Rs. 5 lakh	5%
Rs. 5 lakh – Rs. 10 lakh	20%
Rs. 10 lakh and above	30%

Note: The income tax exemption limit is up to Rs. 2.5 lakh for Individuals, HUF below 60 years aged, and NRIs. Surcharge and cess will be applicable.

Individuals aged 60 years to 80 years

Income slabs	Tax rate
Up to Rs. 3 lakh	NIL
Rs. 3 lakh – Rs. 5 lakh	5%
Rs. 5 lakh – Rs. 10 lakh	20%
Rs. 10 lakh and above	30%

Note: The income tax exemption limit is up to Rs.3 lakh for senior citizens aged above 60 years but less than 80 years. Surcharge and cess will be applicable.

Individuals aged above 80 years

Income slabs	Tax rate
Up to Rs. 5 lakh	NIL
Rs. 5 lakh to Rs. 10 lakh	20%
Rs. 10 lakh	30%

Note: Income tax exemption limit is up to Rs. 5 lakh for super senior citizens aged above 80 years. Surcharge and cess will be applicable.

Mutual funds can help save taxes

Among the many mutual funds available, Equity Linked Savings Schemes (ELSS) are particularly beneficial for reducing tax outflows.

ELSS are a type of mutual fund that offers dual benefits of tax savings and equity investment growth. Under Section 80C of the Income Tax Act, 1961, investments of up to Rs. 1.5 lakh in ELSS schemes are eligible for tax deductions per financial year under the old regime. This makes ELSS an effective option for investors looking to maintain tax efficiency while building wealth. Hence, ELSS investment can effectively reduce your taxable income and may help you enter a lower tax slab.

ELSS funds invest primarily in equities, offering the potential for wealth building in the long term. They come with a mandatory lock-in period of three years, the shortest among tax-saving instruments like Public Provident Fund (15 years) or National Savings Certificate (5 years). Investors can choose to invest a lump sum or opt for a Systematic Investment Plan (SIP) for regular contributions.

Moreover, the three-year lock-in period ensures that capital gains arising from ELSS investments are categorised as Long Term Capital Gains and taxed at a relatively lower rate compared to gains from other types of funds. This can result in further optimisation of your tax outgo.

Limiting tax outflow through the ELSS mutual fund route

Here are some benefits of investing in ELSS mutual funds:

• Shortest lock-in period: ELSS funds come with a lock-in period of three years, the shortest among tax-saving instruments under Section 80C of the Income Tax Act, 1961.
• High growth potential: Since ELSS invests predominantly in equities, they have the potential to deliver higher returns in long term compared to fixed-income instruments.
• Flexible investment modes: You can invest in ELSS through lump sum or SIP, offering flexibility based on your financial goals and cash flow.
• Dual benefit of tax saving and wealth creation: ELSS helps you save taxes while simultaneously building wealth over the long term.
• Tax deductions under Section 80C of the Income Tax Act, 1961: Investments up to Rs. 1.5 lakh in ELSS can be claimed as deductions, reducing your taxable income.
• LTCG gains from ELSS funds are exempted up to Rs. 1.25 lakh annually and taxed at a rate of 12.5% subsequently.
• Ease of Investing: Mutual funds are easy to invest in. Today, many online platforms make the process quick and hassle-free.
• No limit on investment amount: While the tax benefit is capped at Rs. 1.5 lakh, there’s no upper limit on the amount you can invest in ELSS.
• Liquidity post lock-in period: After the three-year lock-in, you can redeem your investment, providing liquidity.
• Professional management: Fund managers with expertise in equity markets handle ELSS funds, increasing the chances of better returns.

Conclusion

Understanding income tax slabs and using tax-saving mutual funds like ELSS can help you save a lot on taxes. ELSS not only helps you reduce your tax burden but also helps you grow your money over time. However, it is prudent to align your investment with your unique objectives and risk appetite before making any investment decisions. When in doubt, always consult a financial expert of tax advisor for tailored solutions.

FAQs:

How do mutual funds help save tax?

Mutual funds, particularly ELSS, offer deductions under Section 80C of the Income Tax Act, 1961, allowing you to reduce your taxable income.

What is ELSS, and how does it provide tax benefits?

ELSS, or Equity Linked Savings Scheme, is a mutual fund eligible for deductions under Section 80C of the Income Tax Act, 1961. It combines tax-saving benefits with equity market returns.

Are mutual fund returns taxable?

Yes, returns on mutual funds are subject to tax and the taxation rates are based on the type of mutual fund (equity oriented or debt) and the investment holding period.

How can SIPs aid in tax planning?

SIPs allow you to invest regularly in ELSS, spreading the tax-saving benefit over the year and making the process more manageable and disciplined.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.