Investing is excellent all by itself! But you’ve got to admit – you add a tax-saving element to it, and it just gets 2x better and more appealing! 

Today, we thought we’d talk a bit about how you can save tax by investing in mutual funds. Let’s do this question by question.

What are tax-saving mutual funds?

Tax-saving mutual funds are investment instruments that allow you to reduce your taxable income by up to ₹1.5 lakhs, under Section 80C of the Income Tax Act of India. These mutual funds are called Equity Linked Saving Schemes (ELSS), and all the best tax-saving mutual funds act and perform exactly like a regular mutual fund, but with the added and enticing benefit of tax saving.

Let’s assume you are earning  ₹10 lakhs in a year, and invest  ₹1.5 lakhs in an ELSS fund in that same year. In this case, when you are filing your income tax returns, you will be taxed on a total of only ₹8.5 lakhs, instead of the full 10 – effectively reducing the total tax being paid by you. 

We know we’ve got your attention now – so let’s keep this momentum going!

What are the benefits of tax-saving mutual funds?

Tax-saving mutual funds or ELSS funds offer a number of benefits to the investor by reducing their total taxable income. But, in addition to providing tax deductions to investors, there are five key benefits that you can leverage if you are investing in tax-saving mutual funds – 

1. Tax-Saving + Earning Potential – ELSS or tax-saving mutual funds mainly invest in equity and related instruments. This gives you – the investor – exposure to the growth of the mutual fund market. While such mutual funds typically have a 3-year lock-in period, you will reap amazing returns if you stay invested for even longer! So, it might be prudent to keep using tax-saving mutual funds as investments for garnering returns as well – the longer you stay invested, the more your money will grow (thank you, compounding!).
2. Tax-Saving + Discipline & Flexibility – You all know about Systematic Investment Plans (SIPs). Instead of investing in large lump sums, SIPs give you the option to invest smaller amounts regularly, over a fixed period of time. And yes – tax-saving mutual funds or ELSS funds offer SIP options for investments too! This means that you can cultivate an amazing (AMAZING!!!) investing discipline while making efforts to reduce your taxable income. That – is the definition of a win-win!
3. Tax-Saving + Diversification – You might think, “The flexibility and earning potential is great – but, there’s no way I can diversify by investing in tax-saving mutual funds!” Well – think again! Investing in tax-saving mutual funds does not need to be restrictive. You can invest in ELSS funds across markets and sectors – giving your portfolio the diversification it needs to thrive. So, you’re not only saving taxes with ELSS funds, but you are also potentially mitigating risk that is associated with market volatility, by spreading your investments across assets!
4. Tax-Saving + Wealth Creation – Yes. The main factor that will help with wealth creation by investing in tax-saving mutual funds is the power of compounding. But,  tax-saving or ELSS funds also have the potential to provide returns that can outpace inflation over the long term. Investing in equities has often outperformed inflation – so, you can actually protect your wealth against erosion in purchasing power while also tax-saving!
5. Tax-Saving + Regulation – Tax-saving mutual funds are regulated by the Securities and Exchange Board of India (SEBI), which is in charge of ensuring your security and maintaining transparency in the investment process. Whether you are opting to invest through digital apps, or by going through fund managers – every validated platform and institution that plays a role in tax-saving investments is regulated by SEBI, the RBI, or both. You can ask for regular audits and research that will help you know exactly how your investments are performing, and take corrective action when and where it is needed – while also reducing your taxable income!

These benefits make a solid case for the appeal of tax-saving mutual funds as regular investment instruments for the smart investor. The only real limitation to tax-saving mutual funds, however, is that you only get a tax break of up to ₹1.5 lakhs under Section 80C, and no more. So, you can cap your ELSS investments at ₹1.5 lakhs, but make other investments throughout the year to maximize your returns.