Investing in mutual funds has become very popular these days. The prime benefit of investing in mutual funds is that they offer better returns in comparison to other traditional modes of investments such as Fixed Deposits, Recurring Deposits, Public Provident Fund, etc., Apart from that, if the mutual fund investment is done in a tax saver scheme, the investors get tax benefits under Section 80C of the Income Tax Act, 1961.
In this article, we will walk you through the various of aspects of saving tax with mutual funds.
Read on!
What is Equity Linked Saving Scheme (ELSS)?
ELSS funds are equity mutual fund schemes which invest majority of their corpus into equity or equity related instruments. These funds are also popularly known as tax saver funds since they offer tax exemption of up to ₹1.5 lakh from one’s annual taxable income under section 80C of the Income Tax Act.
What are the salient features of ELSS funds?
Who should consider investing in ELSS funds?
Salaried Individuals: If you are a salaried employee and want to balance out risk and return in your investment portfolio, then ELSS fund is the best choice for you. You are also eligible for tax deduction under Section 80C. In comparison to other tax instruments, ELSS schemes have the potential of generating higher returns due to more exposure in equity and the lock-in period that helps the fund managers to manage the portfolio well without the fear of frequent redemptions in the funds that they manage.
First time investors: If you are first time investor, SIP in an ELSS fund is an ideal choice for you. SIPs not only help you accumulate more units when the markets are down, but also generating exceptional returns when the markets are favourable. In addition to tax benefits, you also get a flavour of equity investing through ELSS funds.
What are the advantages of investing in ELSS funds?
Shortest lock-in period: ELSS funds have the shortest lock-in period of just 3 years. On the other hand, Tax saving Fixed Deposits have 5-year lock-in period while Public Provident Fund has a 15-year maturity. Hence, in the medium term, ELSS funds offer more liquidity.
Better Post-tax returns: Long Term Capital Gains (LTCG) from the ELSS investment are tax free up to the limit of ₹ 1 Lakh. Gains more than ₹ 1 Lakh attract a tax rate of just 10%. Therefore, higher returns coupled with lower tax rates, ensure that the investors get the best post tax returns.
Possibility of higher returns: Since the ELSS funds are market linked, they have the potential of generating higher wealth for investors with a medium to long-term investment horizon. On the other hand, investments like PPF or FDs or NSCs are fixed income products.
Minimum investment amount: Through Systematic Investment Plan (SIP) one can start investing with as low as ₹ 500 in most of the ELSS funds. This helps the investors to do regular investing in a hassle-free and convenient manner.
Professional Management: Since the mutual fund industry is well regulated, the ELSS funds are professionally managed by experienced fund managers who have in-depth market knowledge. Hence, investors who are novices and do not have any market knowledge can also invest in these funds.
What are the options available in ELSS funds?
Growth Option: Under growth option, your returns are getting reinvested until the time you decide to redeem the fund. In this option, you get the gains only at the time of redemption. But growth option in the long term helps to appreciate the NAV thereby yielding a higher profit to the investors. However, there is one thing investors should remember that the returns are subject to market risk.
Dividend Option: Under dividend option, the investor gets the return in the form of dividends which are completely tax free. However, investors must keep in mind that the fund houses declare dividends only when there are excessive profits.
Dividend Reinvestment Option: Under this option, the dividends that are declared are reinvested in the fund to add to the NAV. This option works well when the market is witnessing an upward momentum for a time period.
What are the tax implications of ELSS funds?
Comparing tax saving through mutual funds with other tax saving options
There are ample of tax-saving options in the market that will help you in creating wealth like FDs, PPFs and NSC. However, the returns are also taxable in these options. And this is precisely where ELSS stands out of the crowd with dual benefit. The returns are generally higher in this option, and it also offers tax advantage.
Now, when this is coupled with the lock-in period, mutual funds are victorious here as well. The below table will give you a much better comparison.
Investment | Returns | Lock-in Period | Tax on Returns |
---|---|---|---|
5 Year Bank Fixed Deposit | 5% to 7% | 5 years | Yes |
Public Provident Fund | 6% to 8% | 15 years | No |
National Savings Certificate | 6% to 8% | 5 years | Yes |
National Pension System | 7% to 10% | Till Retirement | Partially Taxable |
ELSS Funds | 10% to 12% | 3 years | Partially Taxable |
Best Performing ELSS funds:
Based on their historical performances, given below is the list of some of the best performing mutual fund in which you can invest to save taxes along with good returns as on date:
FUND SCHEMES NAME | 1 Year Return | 3 Year Return | 5 Year Return |
---|---|---|---|
Axis Long Term Equity Fund | 16.02% | 11.86% | 13.53% |
DSP Tax Saver Fund | 10.50% | 7.15% | 12.38% |
ICICI Prudential Long-Term Equity Fund | 9.58% | 7.23% | 9.48% |
Invesco India Tax Plan | 13.96% | 8.41% | 11.88% |
Mirae Asset Tax Saver Fund | 17.43% | 10.92% | NA |
Summing up!
Many investors do not aware that there are various tax savings schemes available in the market. Since you are reading this article, we believe you are one of those looking for investment options that will save you from getting taxed.
If this is what the thing with you, you are in the right place. ELSS funds help you achieve two goals with one investment: Tax saving and investing for the retirement corpus. However, mutual fund investments are subject to market risks. Therefore, no matter it is equity or tax saving, the returns solely depend on the market. Hence, for the same reason, you are always suggested to do a thorough research or take the help of an expert before starting your investment.
Happy investing!