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

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

What are income tax slabs?

Income tax slabs refer to the structured ranges of income on which individuals in India are required to pay tax at prescribed rates. Income within each slab is taxed at the rate applicable to that slab. Tax slabs differ for individuals, senior citizens, and super senior citizens under the old regime.

The slab system ensures that taxation progresses with income levels, meaning higher income segments are taxed at comparatively higher rates. The government periodically revises these slabs to align with economic conditions and policy objectives.

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.

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

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

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

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 lower rate compared to short-term capital gains tax. 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.

What are the current Income Tax Slabs for FY 2024-25?

• New tax regime (default): Up to ₹3,00,000: Nil; ₹3,00,001 to ₹7,00,000: 5%; ₹7,00,001 to ₹10,00,000: 10%; ₹10,00,001 to ₹12,00,000: 15%; ₹12,00,001 to ₹15,00,000: 20%; Above ₹15,00,000: 30%.
• Old tax regime (individuals below 60): Up to ₹2,50,000: Nil; ₹2,50,001 to ₹5,00,000: 5%; ₹5,00,001 to ₹10,00,000: 20%; Above ₹10,00,000: 30%.
• Old tax regime (senior citizens 60–80): Up to ₹3,00,000: Nil; ₹3,00,001 to ₹5,00,000: 5%; ₹5,00,001 to ₹10,00,000: 20%; Above ₹10,00,000: 30%.

How to calculate income tax under new vs old tax regime?

Under the new regime, tax is computed using its reduced slab rates without most deductions. Under the old regime, tax is calculated using earlier rates after claiming eligible deductions and exemptions (if applicable). Individuals may compute taxable income under both structures and choose the one resulting in lower overall liability based on their situation.

What is the benefit of rebate under Section 87A?

Section 87a offers a rebate that reduces tax liability for resident individuals with taxable income within the prescribed limit. Under the new regime, the rebate may reduce liability to zero if taxable income does not exceed ₹7 lakh. The old regime provides a lower rebate threshold. No rebate applies above those limits.

For FY 2025-26 (AY 2026-27), the Union Budget 2025 has increased the income limit for Section 87A rebate from Rs 7 lakh to Rs 12 lakh under the new tax regime. Resident individuals with taxable income up to Rs 12 lakh are now eligible for a rebate of up to Rs 60,000.

Are there different slabs for senior citizens?

Under the new regime, senior citizens and other individuals follow the same slab structure. Under the old regime, senior citizens receive higher basic exemption limits compared to non-senior individuals.

Can I switch between old and new tax regimes?

Individuals with salary income may choose a regime every financial year while filing returns. Those with business or professional income may switch with restrictions and must follow prescribed rules. However, those with business or professional income face significant restrictions. They must file Form 10-IEA before the ITR filing due date to opt for the old regime. If they later wish to return to the new regime, they can do so only once in their lifetime by filing Form 10-IEA again in a subsequent year. After this one-time switch back to the new regime, they permanently lose the option to choose the old regime.

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