Here’s What You Need to Know About Tax Saving Mutual Funds in India

 

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Tax saving mutual funds are highly beneficial instruments that help an investor accumulate wealth while getting tax relief. Here’s what you need to know about ELSS mutual funds.

Tax saving mutual funds allow an investor to accumulate wealth while also saving on tax. We may be accustomed to instruments like EPFs (Employee Provident Fund), but there are other options available that provide greater earning potential with a shorter lock-in period.

This option is ELSS (equity linked savings scheme) – a type of diversified tax saving mutual fund which allows tax deductions under Section 80C.

What are ELSS mutual funds?

ELSS mutual funds are equity mutual funds which provide tax relief of up to 1.5 lakhs, under Section 80c of the Income Tax Act 1961. The amount invested has a lock-in period of 3 years. This means you can sell your investment only after a minimum of 3 years, from the date of purchase. It has the shortest lock-in period compared to other tax saving instruments like ULIPS (Unit Linked Insurance Plans) or NPS (National Pension Scheme).

How to invest in ELSS mutual funds?

Investment in ELSS can be done using SIP or lump sum investment.

If the investor opts for the SIP (Systematic Investment Plan) option, each installment has a lock-in period of three years from date of investment, which means each of your installments will have a different maturity date. Once the lock-in period ends, the ELSS mutual fund then becomes an open ended equity investment instrument, and has full liquidity. You can withdraw the funds at any time after 3 years, but the longer you stay invested, the higher the growth potential.

They can be bought directly from an AMC (Asset Management Companies) or via an agent.

What types of tax saving mutual funds are available?

ELSS mutual funds are available under growth or dividend option –

Growth funds help the investor create and accumulate wealth sooner as the income amount is reinvested throughout the duration of the fund, and the investor receives a lump sum payout at maturity.

Dividend funds give back income throughout the scheme duration, so the investor receives regular payouts whenever the fund declares dividends, and just like growth funds, there is also an option to reinvest.

When do I need to invest in tax saving mutual funds and how much will I save?

In order to avail the tax saving benefits of ELSS funds, the investment has to be made before 31^st march of the current financial year in order to qualify for tax relief. By investing the full Rs. 1.5 lakh that is tax exempt, a taxpayer in the highest tax bracket can, at present, save tax of up to Rs. 46,800 (including 4% cess).

Long term Capital Gains on ELSS are tax-exempt up to Rs 1 lakh. Dividends used to be tax free until 31^st March, 2020. All dividends received on or after 1^st April, 2020, is taxable in the hands of the investor.

Key Takeaways

For a first time investor, ELSS mutual funds are ideal to get to know more about mutual funds and investing, and benefiting from high returns.
They allow you to learn the ropes about the market, while getting tax relief as well.
ELSS mutual funds allow an investor to create a diversified portfolio.
Since they’re equity linked, they have the potential to provide higher returns.

As always, do your research before investing in any instrument, and reach out to a financial advisor for personalized recommendations based on your risk appetite and wealth creation goals.