Tax-Savvy Investments: Expert Answers Key Mutual Fund and Capital Gains Queries

Joint Family Investment or Individual MF Accounts?

‘A’, a salaried government employee not currently under the tax regime, wanted to park a lump sum amount—along with his mother's savings from NSC—in mutual funds, preferably in his own name for ease of management. Experts advised that although managing one account is operationally convenient, splitting investments between his and his mother’s accounts could result in better tax efficiency. Since both are currently outside the tax net, creating separate MF accounts is likely to minimize future tax liability, particularly for interest or capital gains.

ELSS Deduction Can Save Tax

With an annual income of ₹3.27 lakh and additional gains from debt mutual funds, ‘A’ questioned whether investing ₹30,000 in an Equity-Linked Savings Scheme (ELSS) would exempt him from tax. The answer was affirmative. Under Section 80C of the Income Tax Act, investments up to ₹1.5 lakh in ELSS are deductible from taxable income, provided the income is not covered under special tax rates like STCG or LTCG. The taxpayer must still declare capital gains separately and calculate taxes accordingly.

Clubbing Provisions on Spousal FD Investments

‘M’ raised a critical tax scenario: If Mr A reinvests ₹50 lakh in a fixed deposit (FD) and places the interest earned in his wife's FD, who bears the tax liability? Experts clarified that under Section 64 of the Income Tax Act, income generated from assets transferred to a spouse without adequate consideration is "clubbed" with the transferor's income. Therefore, Mr A must pay tax on the full interest earned, including that in his wife’s FD, nullifying any tax-saving strategy here.

LTCG Exemption on Sale of Mutual Funds for Property Purchase

‘R’, who had invested ₹50 lakh in debt mutual funds in 2017 and earned ₹25 lakh in gains, asked whether investing the entire ₹75 lakh in a residential plot would exempt him from long-term capital gains tax. The answer hinged on Section 54F of the Income Tax Act. Yes, exemption is available if:

• The entire sales proceeds are invested in a residential house (not just a plot).

• Construction must be completed within 3 years of sale.
  Failure to meet these criteria will disqualify the investor from availing tax exemption.

Inherited Land Sale and Indexation Benefits

‘B’ asked about selling inherited land, originally owned by their grandfather, and how to calculate capital gains. Tax experts recommended determining the "cost of acquisition" based on the fair market value as of April 1, 2001 if the purchase occurred before that date. The cost can be indexed for inflation using official Cost Inflation Index (CII) values to arrive at long-term capital gains (LTCG).

To save on taxes, the individual could:

• Invest the capital gains in a residential property under Section 54,

• Or purchase Capital Gains Bonds (Section 54EC) within six months of sale,

• Or temporarily park the gains in a Capital Gains Account Scheme if immediate investment isn't possible.

Key Takeaways for Investors

1. Use family member accounts strategically, but comply with clubbing rules.

2. ELSS can reduce taxable income, but capital gains need separate treatment.

3. Clubbing provisions limit spousal tax arbitrage.

4. Property-related LTCG exemptions are conditional and time-bound.

5. Inherited asset gains benefit from indexation, and there are multiple legal avenues to avoid tax if reinvested properly.

Disclaimer

This article is intended for informational purposes only. Readers are advised to consult a certified tax professional for personalized financial advice. The information presented here does not constitute financial, legal, or investment advice.