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Business News/ Money / Personal Finance/  Income tax benefits on investment options: Mutual Funds vs Real Estate. Which is better?

The debate over Mutual Funds vs Real estate is not new. Prior to taking the decision to invest in real estate or mutual funds, investors should carefully consider their level of risk tolerance, and financial targets, as well as investment horizon. Apart from long-term benefits, it's also important to understand the income tax benefits of investing in mutual funds and real estate.

As per Section 80C of the Income Tax Act, equity-linked savings scheme investments are qualified for the deduction up to a limit of a maximum amount of 1.5 lakh each fiscal year. "Gains from equities mutual funds that have been held for more than a year are regarded as a long-term therefore are now tax-free up to 1 lakh. Any gains in excess of one lakh rupees are subject to tax at 10% without indexation. Furthermore, there isn't any Dividend Distribution Tax (DDT on equity mutual funds; nonetheless, investors may be required to shell out tax upon dividend earnings based on their tax bracket," said Amit Gupta, MD, SAG Infotech

Profits from the sale of real estate are usually taxed as capital gains. “However, in certain countries, exemptions or lower rates may be available for principal residences or properties kept for a specific amount of time," said Suren Goyal, partner, ofRPS Group.

A home loan provides a number of benefits upon repayment through tax deductions under the Income Tax Act of 1961. A home loan repayment consists of two parts: the principal amount and the interest paid on the amount borrowed. Under Section 80C and 24(b) of the Income Tax Act of 1961, you are eligible to get tax advantages on each of these categories. 

“Deductions for home loan principle and interest payments may still be possible for self-occupied houses under Sections 24(b) and 80C, although the limitations and restrictions may have changed since my previous update. Long-term and short-term capital gains from real estate may still be taxed according to the same broad principles as previously explained, but tax rates and exemptions may alter," said Suren Goyal.

As per Ashish Aggarwal, MD, Acube Ventures, real estate offers diversification benefits to investors due to the fact that it is not tightly linked to traditional asset categories such as shares and bonds. “Real estate investments can thereby reduce overall portfolio exposure to volatility and risk. Mutual funds offer advantages for diversification as well, although they might not offer the same level of insurance amid market downturns," said Aggarwal.

According to tax and investment experts, while investing for the long term, the first and foremost thing that investors should look at, is to choose an option that can generate inflation-beating returns. This means, your investment tool should yield more than 7-8% annual return.

According to investment experts, generally, long-term mutual funds investment gives at least a 12 per cent return whereas real estate investment gives around 8 per cent return in the long term.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Sangeeta Ojha
A business media enthusiast. Writes on personal finance, business and banking.
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Updated: 14 Sep 2023, 02:02 PM IST
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