What are tax saving mutual funds

Tax saving mutual funds, or ELSS funds, are investment funds that put most of their money into stocks. They let you save on taxes up to Rs. 150,000 yearly under Section 80C. These funds have a three-year lock-in period and can offer high returns.
EXPLORE FUNDS
Tax saving mutual funds meaning
EXPLORE FUNDS
4 mins
21-June-2024

Tax Saving Mutual Funds, specifically Equity Linked Saving Schemes (ELSS), stand out as attractive options for investors seeking tax benefits with wealth appreciation.

ELSS funds aid in tax savings by enabling a deduction of up to Rs. 1,50,000 from taxable income under Section 80C of the Income Tax Act. They feature a brief lock-in period of three years, the shortest among tax-saving investments, and hold promise for significant returns.

What are tax saving mutual funds?

Tax Saving Mutual Funds, commonly known as ELSS, are a category of mutual funds designed to offer benefits of tax savings under Section 80C of the Income Tax Act. The potential for wealth creation through equity investments is high. These funds have a lock-in period of three years, distinguishing them from traditional tax-saving options.

5 features of elss mutual funds

Here are 5 features of ELSS mutual funds:

  1. Equity Investment: ELSS primarily invest in equities, providing investors an opportunity to participate in the potential growth of the stock market.
  2. Lock-in Period: ELSS funds have a mandatory lock-in period of three years, the shortest among any 80C tax-saving instrument, promoting long-term wealth creation.
  3. Diversification: ELSS portfolios are diversified across sectors and market caps, reducing concentration risk and enhancing stability.
  4. Lump Sum or SIP: Investors can choose between lump sum investments or Systematic Investment Plans (SIPs), offering flexibility in investment strategies.
  5. Tax Benefits: ELSS funds provide tax deductions up to Rs. 1.5 lakh under Section 80C, making them an efficient tax-saving tool.

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How do tax saving mutual funds work?

Tax Saving Mutual Funds invest predominantly in equity and equity-related instruments, aligning with the market's growth potential. The lock-in period ensures a disciplined investment approach and encourages investors to stay committed to their financial goals.

Advantages of investing in tax saving mutual funds

Here are a few advantages of investing in tax saving mutual funds:

  • Dual Benefits: ELSS funds offer the combined advantage of tax savings and potential wealth creation through equity exposure.
  • Short Lock-in Period: With a lock-in of three years, ELSS provides liquidity compared to other tax-saving options like PPF and NSC.
  • Professional Management: ELSS funds are managed by fund managers who make informed investment decisions to optimise returns.

Who should invest in tax saving funds?

Tax Saving Mutual Funds are suitable for investors who seek tax advantages and are willing to commit to a three-year lock-in period. They are ideal for those looking for equity exposure and potential wealth appreciation while fulfilling their tax-saving obligations.

How to evaluate the best ELSS mutual funds

Criteria

Description

Fund returns

Compare the fund's performance with its peers over several years to assess consistency. Past performance does not guarantee future returns, which hinge on market dynamics and fund manager decisions. Invest based on consistent historical performance.

Fund history

Opt for fund houses with a strong track record spanning 5 to 10 years. A fund's performance is judged by the quality of stocks in its portfolio and benchmark performance.

Expense ratio

The expense ratio reveals the percentage of your investment used for fund management. Lower expense ratios mean higher net returns. Choose funds with similar track records and asset allocation but lower expense ratios for better returns.

Financial ratios

Analyze various metrics like Standard Deviation, Sharpe Ratio, Sortino Ratio, Alpha, and Beta to evaluate fund performance. Funds with higher Standard Deviation and Beta pose greater risk. Opt for funds with higher Sharpe Ratio for superior risk-adjusted returns.

 

How can you save Rs 46,800 in tax through ELSS?

ELSS is a type of mutual fund that is eligible for tax deductions under Section 80C of the Income Tax Act in India. This means that you can reduce your taxable income by up to Rs 1.5 lakh per year by investing in ELSS.

Here’s how much tax you can save depending on your income tax bracket:

For example, if you are in the 30% income tax bracket, you can save up to Rs 46,800 in tax by investing Rs 1.5 lakh in ELSS. This is because you would get a tax deduction of Rs 45,000 on your investment, plus an additional Rs 1,800 in health and education cess savings.

  • Maximum amount you can invest under Section 80C for ELSS: Rs. 1,50,000
  • Income tax rate: 30%
    • Income tax saved: Rs. 45,000 (Rs. 1,50,000 x 0.3)
    • Health and education cess @ 4%: Rs. 1,800 (Rs. 45,000 x 0.04)
    • Total tax saved: Rs. 46,800 (Rs. 45,000 + Rs. 1,800)
  • Income tax rate: 20%
    • Income tax saved: Rs. 30,000 (Rs. 1,50,000 x 0.2)
    • Health and education cess @ 4%: Rs. 1,200 (Rs. 30,000 x 0.04)
    • Total tax saved: Rs. 31,200 (Rs. 30,000 + Rs. 1,200)

ELSS is a good option for people who are looking to save tax and grow their wealth over the long term. However, it is important to note that ELSS investments are subject to market risk, which means that the value of your investment can go down as well as up. You should carefully consider your investment goals and risk tolerance before investing in ELSS.

How to invest in tax saving mutual funds?

Investing in Tax Saving Mutual Funds is a streamlined process. Investors can choose from various online investment platforms like Bajaj Finserv, to invest in the ELSS fund of their choice. KYC compliance is a prerequisite, followed by selecting the desired ELSS fund based on risk tolerance and financial goals.

Conclusion

Tax Saving Mutual Funds, particularly ELSS, emerge as a compelling avenue for individuals keen on optimising their tax liabilities while participating in the wealth creation potential of equity markets. These funds offer a unique blend of tax efficiency, professional management, and the prospect of substantial returns.

Calculate your expected investment returns with the help of our investment calculators

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Frequently asked questions

What is a tax saving mutual fund?

A tax saving mutual fund, or ELSS (Equity Linked Savings Scheme), allows investors to save tax under Section 80C of the Income Tax Act. These funds primarily invest in equity and have a mandatory lock-in period of three years.

Is it worth investing in tax saver mutual funds?

Investing in tax saver mutual funds can be beneficial due to potential returns from equity investments and tax savings up to Rs. 1.5 lakh annually under Section 80C. However, risks associated with equity markets should be considered.

How do I check if my mutual fund is a tax saver?

Verify if your mutual fund is a tax saver by checking its scheme name or category. ELSS funds explicitly mention their tax-saving nature in their documentation and marketing materials.

How to choose a tax saver mutual fund?

When choosing a tax saver mutual fund (ELSS), consider factors such as past performance, fund manager expertise, expense ratio, and investment tenure aligned with your financial goals and risk tolerance.

What is the difference between tax saver mutual fund and normal mutual fund?

Tax saver mutual funds (ELSS) have a lock-in period of three years, during which investors cannot redeem their investments. This period is shorter compared to other mutual funds which do not offer tax benefits under Section 80C.

What is the lock period for tax saving mutual funds?

Tax saving mutual funds (ELSS) have a lock-in period of three years, during which investors cannot redeem their investments.

Can I break my tax saver mutual fund?

Breaking a tax saver mutual fund (ELSS) before the lock-in period of three years is not permitted, except under specific conditions like the investor's demise or disability.

Which SIP is tax free under 80C?

SIPs (Systematic Investment Plans) in ELSS mutual funds qualify for tax benefits under Section 80C of the Income Tax Act, subject to the overall limit of Rs. 1.5 lakh per financial year.

What is the limit of tax saving mutual funds?

The maximum limit for tax saving through mutual funds under Section 80C is Rs. 1.5 lakh per financial year, which includes investments in ELSS funds, PPF, NSC, etc.

How to invest in ELSS mutual funds through SIP online?

To invest in ELSS mutual funds through SIP online, select a fund house offering ELSS, register with their online platform, complete KYC, choose the SIP amount and duration, and authorize payments through net banking or other accepted modes.

How to invest a lump sum in ELSS mutual funds?

To invest a lump sum in ELSS mutual funds, identify a suitable fund based on your risk profile and financial goals, complete the necessary KYC with the chosen fund house, and initiate the investment through their online platform or authorized intermediaries.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

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(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

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