How do save Tax by Investing in Mutual Funds?

These days, investing in mutual funds has become increasingly popular. By utilizing the skills and knowledge of qualified investment managers, these investment solutions give investors the opportunity to participate in a variety of financial instruments.

The best feature of these investing tools is that they provide higher returns than other conventional investment options like fixed deposits. Mutual funds pool money from numerous participants in order to accomplish this goal, and they then invest it in a well-balanced portfolio of debt and equity instruments.

Additionally, the funds provide a variety of investment options, such as open- or closed-ended plans, specialty funds, or combinations of all of these. Investors can select any fund depending on their investment goals and level of risk tolerance. Investments with high risk often provide high returns, those with medium risk yield medium returns, and those with little risk yield low returns. Nevertheless, it is up to the investors to choose the fund they believe offers the best prospects of helping them achieve their goals.

It is appealing to invest in mutual funds and reap the rewards. What happens to the taxes that investors pay on their income, though, do you know? Do they receive any tax advantages for their mutual fund investments? The truth is that investors receive tax benefits under section 80C of the Indian Income Tax Act, 1961 if their mutual fund investment is made in a tax-saving mutual fund.

What if someone told you that you could build money over the long term while obtaining tax advantages? You might think of traditional savings options with lengthy lock-in periods. However, there are other tax-saving investments with a shorter investment horizon that can potentially offer you returns that are in line with your expectations.

A sort of mutual fund product known as an equity-linked savings plan (ELSS) also functions as a tax-saving tool.

What are mutual funds that save on taxes?

Mutual funds offering tax savings are identical to other mutual funds but have an additional tax benefit. Investments made in tax-saving mutual funds are eligible for tax benefits under section 80C of the Indian Income Tax Act, which is a unique feature of this form of the mutual fund. The majority of tax-saving mutual funds are ELSS plans that invest in the market for growth-oriented stocks.

What’s the process for Tax Saving Mutual Funds?

The capital invested by an investor in a mutual fund is added to the pool. When the fund’s portfolio corpus is invested in the equity market, it is done so in a balanced manner that, even if one investment loses money, the other one is able to offset the loss. For instance, the breakdown of an investment in a specific fund can resemble:

  1. Automotive industry – 6.56%

  2. Banks – 17.56%

  3. Consumer durables – 5.34%

  4. Consumer non-durables – 5.66%

  5. Power – 5.92%

  6. Software – 8.93%

  7. Pharmaceuticals – 9.99%

The accompanying table illustrates the average allocation of a mutual fund’s assets among market securities. This indicates that 6.56 percent of the investment will go into the auto sector, 17.56 percent into banks, and so on.

The investment cannot be withdrawn until the conclusion of the maturity period with ELSS schemes, which typically have a 3-year lock-in period. The lock-in period for each installment if the investment is made in systematic monthly installments (SIP) is three years. The first installments will be unlocked on January 1, 2018, for instance, if the initial investment was made on January 1, 2015, and the second one on February 1, 2015. However, the second installment won’t be unlocked until February 1. 2018.

Investors may only redeem unlocked units from the fund at the current NAV price when it comes to unit redemption. The amount that an investor receives for each unit upon redemption is known as the unit’s NAV, or Net Asset Value. You will need to submit a claim form to the mutual fund provider and be aware of the scheme’s available unit count to make withdrawals. They will credit the money to your account as soon as it is processed.

Types of Equity-linked Savings Scheme (ELSS)

The tax-saving mutual fund’s category includes two different types of plans. The first is a dividend plan, while the second is a growth plan. The growth schemes produce a long-term capital appreciation for the investors that can be redeemed at the end of the maturity period, in contrast to the dividend schemes, which allow investors to receive additional income in the form of dividends declared by the relevant fund house from time to time depending on the availability of the distributable surplus. The dividends can be withdrawn or reinvested in the fund and will qualify for tax benefits. They are also not subject to taxes or lock-in periods. For the ELSS growth plans, there are no such provisions.

Features of Tax Saving Mutual Funds

The unique characteristics of equity-linked savings schemes that make them a successful investment choice for investors are as follows:

  • You can start investing in ELSS with just Rs. 500 if you can’t afford to put large quantities of money into the fund. In contrast to PPF and NSC, ELSS has no maximum investment amount.

  • There is no maximum investment amount, but only investments of Rs. 100,000 would qualify for tax benefits.

  • The lock-in period for investments made in tax-saving mutual funds is three years.

  • Investments made in ELSS are subject to market risks because they are mutual funds by nature, and these risks might be minimal medium, or large depending on where the funds are invested.

  • Tax-saving mutual funds are often open-ended ELSS (Equity Linked Savings Schemes) investments.

  • These mutual funds provide subscribers with nomination options.

  • Entry and exit loads are a feature of the majority of ELSS systems. These are the charges made by the providers when investors buy, sell, redeem, or transfer fund units.

Benefits of Tax Saving Mutual Funds

Mutual funds that save taxes provide investors with a variety of advantages. The following are a few of the crucial ones:

  • Tax benefits of up to Rs. 1.5 lakh may be available for investments made in these kinds of funds.

  • Under these plans, long-term capital gains are not taxed.

  • Investments in these plans can be made as a way to budget for future costs like purchasing a car or making a down payment on a home.

  • These programs eliminate the requirement for lump-sum investments by allowing investors to make monthly investments through SIPs (Systematic Investment Plans).

  • In order to reduce the danger of significant losses, the assets in the portfolios are not all invested in one location.

  • If you decide against withdrawing your investment, it will keep growing and turn into a respectable sum of funds for an emergency.

  • You may not be able to withdraw the original amount, but even during the lock-in period, you can withdraw the dividends that were received.

  • These mutual funds have a lock-in term of just three years, as opposed to the six to fifteen years offered by other investing options.

  • Investments may be made at any time of the year because these plans are open-ended in nature.

  • Professional fund managers with extensive market understanding professionally oversee the funds. As a result, investors who are unfamiliar with the market can also invest in these funds.

Tax Saving Mutual Funds ELSS vs. PPF vs. FD

Investment EligibilityAny Individual Taxpayer, including NRI’sResident Indian individualsAny Individual Taxpayer, including NRI and HUF
Investment AmountRs.500 up to No LimitRs.500 up to Rs.1.5 lakhRs.100 to up to Rs.1.5 lakh
Lock-in-PeriodThree years15 yearsFive years
Tax on ReturnsTax-freeTax-freeTaxable
Expected Returns10% to 15% (market-related)No ReturnNo Return
Investment OptionMedium to Long TermLong TermMedium to Long Term
Loan FacilityPartial loan after completion of 3 yearsLoan available after completion of 3 yearsNo loan available
Risk FactorRisk associatedNo RiskNo Risk
Tax Saving BenefitRs.1.5 lakh as specified under Section 80C of Income Tax Act, 1961Rs.1.5 lakh as specified under Section 80C of Income Tax Act, 1961Rs.1.5 lakh as specified under Section 80C of Income Tax Act, 1961

What is ELSS (Equity Linked Savings Scheme)?

Simply defined, an equity-oriented mutual fund that qualifies for tax deductions under the Income Tax Act of 1961 is referred to as an ELSS. The open-ended equity-oriented ELSS mutual funds invest mostly in domestic company shares and provide investors with growth through capital appreciation. The performance of the stock market affects the returns from ELSS funds. You must invest in ELSS funds for at least three years in order to receive the tax breaks.

Funds offered through ELSS can be divided into:

  • Option for growth: The ELSS option for growth can aid in asset accumulation. At maturity, the investor is given a lump sum payment equal to the whole redemption amount.

  • Option for dividends: ELSS options for dividends provide income to investors over the life of the program. When the fund releases dividends, investors have the option of receiving payouts or reinvesting them.

Tax benefits of investing in ELSS

Under Section 80C of the Income Tax Act, 1961, ELSS mutual funds enable tax savings. Tax deductions for investments up to 1,50,000 are allowed per year. Even though you can invest more, any extra money won’t be eligible for tax deductions.

When returns from equity-oriented mutual funds or equity shares total more than Rs. 1,00,000 in a year, a long-term capital gains tax of 10% is applied to those earnings from ELSS funds. If you choose the dividend option, dividends will be subject to taxation at the investor level. Prior to disbursements, the mutual fund will deduct TDS at a rate of 10% for resident investors and 20% (plus any relevant surcharge and cess) for non-resident investors. However, when filing their annual returns, investors can claim a tax credit for TDS that was deducted.

Although this is the case, ELSS funds can still be regarded as one of the finest tax-saving investment options due to their high return probability and comparably short lock-in time when compared to other options.

How to invest in ELSS?

Like other mutual fund schemes, you have the option of investing a flat payment or using a systematic investment plan (SIPs). If you choose the latter, keep in mind that each SIP is treated as a unique investment and, as such, has a three-year lock-in period. Investors can calculate and estimate the returns on their SIP investment using a SIP calculator. A minimum lump sum investment in an ELSS fund is typically 500.

Buying ELSS is very similar to buying other mutual funds. You have the choice to invest online or get in touch with a mutual fund distributor.

How to Choose an ELSS fund?

Depending on your objectives, compare several plans based on their past performance once you have chosen between growth or dividend. While not a guarantee of future success, this can serve as a reasonable signal. Check the consistency of the returns as well. Age and fund size are additional factors to take into account. Investor confidence is better when a larger fund is sustained over time.

Instead of following the market trend, you should look at additional signs and choose a fund that is most in line with your financial goals.

Things to consider while investing in ELSS (Tax Saving Mutual Funds)

There are a few considerations you should make when deciding whether to invest in ELSS tax-saving mutual funds:

  1. Goals: Describe the benefits of investing in ELSS funds. The returns can assist you in achieving other objectives, such as taking a vacation or buying a car, in addition to saving you money on taxes.

  2. Risk: Since ELSS funds invest primarily in stocks, they are considered risky investments. There is no assurance of returns. Make sure you are risk-capable enough to invest in them.

  3. Tax exemption: Section 80C of the Income Tax Act allows for tax deductions on ELSS investments of up to 1,50,000 per year. However, the area also offers additional choices, such as life insurance and provident funds. The entire ELSS payment might not be deductible if you have other claims.

  4. Time horizon: It will take at least three years before ELSS funds can be redeemed. Verify that you won’t require the money at that time.

What to consider before investing in ELSS?

  • Equity-oriented mutual funds (ELSS) also serve as tax shelters.

  • Section 80C of the Income Tax Act allows tax deductions for ELSS investments up to 1,50,000 rupees per year.

  • Over $1,000,000 in returns (from equity-oriented mutual funds and equity shares) will result in a 10% long-term capital gains tax.

  • You can extend your investment for longer than the three-year lock-in period.

  • Even though there is a great chance of profit, investing in ELSS is risky.


One of the better solutions that could aid in wealth creation and tax savings is equity-linked savings plans. But before you dive in headfirst, do your homework, consider your financial objectives, and make sure you are familiar with the features, just like with any other investment.