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Tax Saving Mutual Funds

As per the provisions of the Income Tax Act, 1961, section 80C, the investment that comes under this criterion is available for a tax deduction. One such popular investment that comes under section 80C is ELSS (Equity Linked Saving Scheme) or also known as Tax Saving Mutual Funds. By investing in ELSS, a taxpayer can avail a benefit of up to INR 1,50,000 on his/her taxable income that will become tax-free.

Features of Tax Saving Mutual Funds

  • Tax Saving mutual funds are diversified equity mutual funds and most of the investment under these mutual funds goes into equities.
  • The investment is made in a variety of equity funds which give a balance of good returns to the investor.
  • You can purchase tax saving mutual fund online or from offline platforms
  • ELSS funds don't have entry or exit load charges

Benefits of Investing in Tax Saving Mutual Funds

Lowest Lock-in Period

Tax saving mutual fund or ELSS funds have the lowest lock-in period of just 3 years from the date of investment.

Best Tax saving investment under Sec 80C

Tax saving mutual funds or ELSS are regarded as the best investment option under sec 80C due to the history of good returns in comparison to other tax saving instruments.

Option to invest monthly

Tax saving mutual fund or ELSS give an affordable option to invest monthly as low as INR 100 or INR 500 under SIP (Systematic Investment Plan) scheme so your monthly budget does not get disturbed. This SIP scheme also helps you in gradually building huge savings in instalments throughout the year.

Higher returns than FD / PPF

Due to its high returns linked to the market profits, ELSS or tax saving mutual funds returns have been impressive and higher than bank FD and postal PPF schemes.

How do Tax Saving Mutual Funds Work?

Tax savings mutual funds can be invested through SIP program or a lump sum payment. The investment of many such investors is clubbed together and gets invested in a variety of equity funds. Almost 70% to 80% of the funds of a tax saving mutual fund get invested in equities. Tax saving mutual funds have a lock-in period of 3 years; this means that the investment has got a good time period to grow.

In equities, you need to keep your investment for a long period of time to see good results. ELSS scheme comes in two return options:one is growth scheme and the other is dividend scheme. In dividend scheme, investors are eligible to get regular dividends but the dividends received are taxable as per the income tax bracket.

Comparison with other Tax Saving Investment Plans

Investment PlanReturn %Lock in PeriodMaturity Amount Taxable
FD6.5 to 7.55Yes
PPF7 to 815No
NSC7 to 85Yes
NPS7 to 8 Till Retirement Partially
ELSS Funds12 to 14 3Yes

Best Performing Tax Saving Mutual Funds in India

  • Reliance Tax Saver Fund
  • Axis Long Term Equity Fund
  • Aditya Birla SL Tax Relief 96 Fund
  • IDFC Tax Advantages ELSS Fund
  • Tata Tax Advantage Fund
  • DSP BR Tax Saver Fund
  • Invesco India Tax Fund
  • Franklin India Tax Shield Fund

Tax Saving Mutual Funds FAQ

What is a tax saving fund?

Tax saving fund aka ELSS (Equity Linked Saving Scheme) is a mutual fund investment which comes under section 80C of the Income Tax Act, 1961 and hence is called a tax saving fund. ELSS funds invest in equities or equity related securities and have a lock-in period for 3 years. This means you cannot access your money out of this fund for 3 years.

Are all mutual funds tax-free?

No, mutual funds that come under ELSS (Equity Linked Saving Scheme) are the only ones which are tax-free.

What are the tax benefits of mutual funds?

In mutual funds, you can avail a tax benefit of up to INR 1.5 lakh under section 80C of the Income Tax Act, 1961.

Do all mutual funds have tax benefits?

ELSS (Equity Linked Savings Scheme) or tax-free mutual funds are the only mutual funds which have tax benefits. The ELSS mutual funds can get you tax benefit of up to INR 1.5 lakh investment under section 80C of the Income Tax Act, 1961.

What is the maximum amount that can be invested in these funds?

You can invest any amount of money in ELSS or tax-free mutual fund, but the tax benefit can be availed only on INR 1.5 lakh worth of investment as per the criteria laid in section 80C of the Income Tax Act, 1961.