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Tax Saving Mutual Funds: Features, Benefits And Options

“Tax-saving”

Like music to your ears – Isn’t it? Kind of like “investing” is music to our ears!

When you’re a young professional and you start earning, there are a lot of things you have to figure out –personally, professionally, and financially. The financial aspect of things includes spending (duh!) … but also – budgeting, investing, saving … and most importantly – paying taxes!

Before we get ahead of ourselves – keep in mind that individuals who are earning under ₹2.5 lakhs are exempt from paying income tax. However, if you are earning more than that, then you are eligible to pay taxes – and investing in tax-saving mutual funds is a good way to –

  1. Invest regularly!
  2. Reduce your taxable income.

So, we thought we’d share some of the basics about tax-saving mutual funds with you, and leave you with a few popular options to check out. Let’s not waste any time! Tax-saving doesn’t just happen on its own!

We’ll start with the most fundamental question – What are Tax-Saving Mutual Funds?

Tax-saving mutual funds, also known as Equity Linked Saving Schemes (ELSS), are a segment of mutual funds that offer tax benefits to the investor, under Section 80C of the Income Tax Act in India. Think of ELSS as equity funds that are a double-edged sword – they allow investors to accumulate appreciating capital while cutting them some slack on their taxable income!

Disclaimer: Under Section 80C of the Income Tax Act of India, a maximum of ₹1.5 lakhs can be exempt from tax, if invested in any tax-saving mutual fund, or ELSS fund.

Features of Tax-Saving Mutual Funds

Apart from offering dual benefits to investors, tax-saving mutual funds also have certain unique features – which can be beneficial and good to know about. Here, we have identified three such key features that all popular tax-saving mutual funds in India have –

  1. Lock-In Period – All tax-saving mutual funds in India have a 3-year lock-in period. This means that if you have invested in ELSS funds you must stay invested for at least 3 years. After the 3-year lock-in period is complete, investors can choose to either continue with their investment (yay!), or redeem their investment and returns. Based on your financial goals, and tax-saving necessities, you can choose what to do once the investment matures. (Psst – If lock-in periods make you nervous, we’ve got some important information for you!)
  2. SIP – Systematic Investment Plans, or SIPs allow investors to invest in small installments rather than through large lump sums. Tax-saving mutual funds in India also allow investors to set up SIPs for such investments. Setting up SIPs for ELSS funds ensures that routine investments are made, and it also helps leverage rupee cost averaging, to optimize the returns on investments.
  3. Flexibility – You can choose how much you want to invest in any tax-saving mutual fund of your choosing. Most ELSS tax-saving mutual funds allow investors to invest as little as ₹500 through SIPs, and there is no limit to how much one can invest in these. But remember, there is a ₹1.5 lakhs limit on how much income can be exempt from tax if you are investing in ELSS.

And there you have it – three key features that make tax-saving mutual funds an advantageous and lucrative option for investors. As far as we’re concerned, saving tax and investing are both winners – so you really can’t go wrong here!

Benefits of Tax-Saving Mutual Funds

Let’s take a more in-depth look at some of the benefits that make tax-saving mutual funds such a winner in our eyes –

  1. Tax Benefits – Duh! Let’s say you are earning ₹6 lakhs a year – this is your total taxable income – and you decide to invest in some tax-saving mutual funds to start investing (and catching a break!). Whatever amount you invest in one financial year toward ELSS funds, will get deducted from your total taxable income. So if you invest ₹1 lakh in ELSS funds, then your taxable income for that financial year will be ₹5 lakhs, instead of the full ₹6 lakhs. (And you already know that this limit is capped at ₹1.5 lakhs!)
  2. Higher Returns – ELSS funds aren’t your only recourse for tax-saving in India. You also have other instruments like Fixed Deposits, and a Public Provident Fund (PPF) at your disposal. But the returns on such investments are fairly low, and the time of maturity for the latter is quite long! Tax-saving mutual funds predominantly invest in equities, and as such, they have the potential to deliver higher returns compared to the aforementioned tax-saving instruments. Of course, it goes without saying that mutual fund investment is always subject to market risk.
  3. Diversification – You’ve got a fund that’s helping you save, and a fund that’s helping your money grow. Tax-saving mutual funds are another (and an important) feather in your cap! These types of mutual funds are a good way for investors to create a diversified portfolio of equities across various sectors and market capitalizations. A little diversification mixed in with your tax-saving endeavors will also help mitigate investment risks, and can potentially garner steady returns.

Ultimately, the takeaway here is that these three key advantages make tax-saving mutual funds a superlative option for investors, old and new!

Popular Tax-Saving Mutual Funds in India

It is important to always remember that returns mutual fund investments carry an inherent risk, as they are influenced by a number of factors and are susceptible to market fluctuations. It is important you do your due diligence before picking an ELSS fund that fits your financial goals well.

Here are some of the popular tax-saving mutual funds in India today –

  1. Motilal Oswal Long-Term Equity Fund
  2. SBI Long-Term Equity Fund
  3. HDFC Taxsaver Fund
  4. Tata India Tax Savings Fund
  5. Kotak Tax Saver Fund

Be sure to gauge your investing capacity and risk appetite before investing, and use the tax-saving mutual funds that are available in the market to help you save some tax, and further your financial goals.

Tell us in the comments – what are some of the best ELSS funds with high returns?

FAQs

  1. What are tax-saving mutual funds?
    Tax-saving mutual funds, also known as Equity Linked Saving Schemes (ELSS), are a segment of mutual funds that offer tax benefits (up to ₹1.5 lakhs) to the investor, under Section 80C of the Income Tax Act in India.
  2. Can I use SIP for tax-saving mutual funds?
    Yes. Most ELSS tax-saving mutual funds allow investors to make payments through SIPs, allowing them to invest as little as ₹500.
  3. Can I invest in multiple tax-saving mutual funds?
    Yes. But the tax exemption limit stays fixed at ₹1.5 lakhs for tax-saving mutual funds. Any investments in ELSS mutual funds over this amount can still be made for the purpose of gaining returns.
  4. Is there a lock-in period for tax-saving mutual funds in India?
    Yes. Most tax-saving mutual funds and ELSS funds have a 3-year lock-in period. Investors can only redeem their investment at the end of this time period.
  5. Are tax-saving mutual funds better than PPFs?
    Tax-saving mutual funds are likely to offer a higher interest rate than traditional PPFs. You can also access your investments after 3 years when it comes to ELSS funds, but the maturity for a PPF is much longer.

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