Mutual Funds are among the smartest ways to save tax since they have the flexibility needed to avail tax benefits in a pocket-friendly manner. This asset class allows investors to save tax by parking small manageable amounts through the year and accumulate the savings needed to avail the tax benefits offered under the Income Tax Act. There are, however, some doubts that accompany tax saving mutual funds. Let's clarify those doubts.
Tax Saving Mutual Funds, commonly known as ELSS (Equity Linked Saving Schemes), are like other mutual fund schemes and manifest gains over time. The only difference between tax-saving mutual funds and other mutual fund schemes is that they offer the additional benefit of tax saving. These funds are eligible for tax rebates under Section 80C of the Income Tax Act.
Typically, the investments made under tax-saving mutual funds are equity-linked, and help investors create wealth and achieve higher returns. Most of the tax-saving mutual funds are ELSS schemes, and offer investors a tax rebate of up to Rs. 1,50,000, helping them save up to Rs 46,800 on taxes every year. Also, investments in tax-saving mutual funds are usually made in the multi-cap category.
How do they work?
Tax-saving mutual funds combine the money of several investors and invest it ahead in the equity market. ELSS Funds have a mandatory three-year lock-in period, and the investor cannot liquidate the investment before the conclusion of the lock-in.
Also, the lock-in period for each individual installment is three years, starting from the day the contribution was made. For example, if the first installment was made on August 1, 2020, and the second was made on September 1, 2020, then on August 1, 2023, the lock-in for only the first installment will end, whereas the second one will end on September 1, 2023.
Choosing the best investment schemes and figuring out the amount that will be saved can be a task. Investors can start by gaining an idea of the amount of tax they can save when investing in tax-saving mutual funds using anELSS Calculator. Listed below are some other pointers investors must consider before choosing to invest in tax-saving mutual funds or ELSS Funds.
Investor's Risk Profile
Since ELSS Funds are equity-linked, they are vulnerable to market fluctuations. Hence, before choosing them as an investment alternative, investors should carefully analyze their risk-taking capacity and check the structure of their current portfolio. The best investments are those that are compatible with the investor's profile.
Scheme / Fund History
Although a scheme's previous performance does not guarantee future returns, it often helps investors get a fair idea of what they are getting into. An efficient fund history suggests that the funds are well-managed and free of compliance concerns.
Previous Performance of Fund House
When selecting a tax-saving mutual fund, it is important to check the previous performance of the fund house or AMC. Investors must compare the performance of funds previously floated by the AMC before finalizing the best possible alternative.
Professional Recommendation
Choosing and investing in ELSS Funds can be challenging at times, and therefore, it is advisable to get professional assistance. Usually, mutual fund distributors are equipped with the tools needed to evaluate schemes based on all the necessary parameters.
How to invest in tax-saving mutual funds?
Investing in tax-saving mutual funds or ELSS schemes is similar to investing in other mutual funds. However, to invest in mutual funds, an investor needs to be KYC compliant. One can invest in tax-saving mutual funds through online platforms like PRODIGY Pro.
Apart from this, one can also invest in tax-saving mutual funds directly through an AMC or via a mutual fund distributor. To create an account with the AMC, investors must provide all the necessary details like their name, mobile number, identification documents, etc.
Tax Saving Mutual Funds offer a variety of benefits to investors. Listed below are some of the benefits-
Tax Saving Benefit
Tax-saving mutual funds, specifically ELSS plans offer investors tax rebates under Section 80C of the Income Tax Act. The investors are eligible for a deduction of up to Rs. 1,50,000 in their annual income and can save up to Rs 46,800 on taxes per year.
Investment Methods
Investors are provided with two options when investing in tax-saving mutual funds. The first option is investing through an SIP. Herein, investors can contribute in portions, i.e. weekly, monthly, quarterly, based on their convenience. Other than that, they can also invest in one go in a lump sum.
Shortest Lock-In Period
ELSS Funds have the shortest lock-in period as opposed to other tax-saving options i.e. 3 years. For instance, PPF schemes have a mandatory lock-in of 5 years.
Higher Post Tax Returns
Tax saving mutual funds or ELSS schemes offer a tax exemption of up to Rs 1,25,000 on long-term capital gains (LTCG). Also, profits beyond this threshold are taxed at only 12.5%. In simple terms, lower tax rates and higher returns translate into the highest possible post-tax profits.
Features of Tax Saving Mutual Funds
Listed below are the features of tax-saving mutual funds, also known as ELSS funds-
Although we have listed what might be considered the "best" Tax-Saving Mutual Fund schemes in the section below, we would like to remind investors that there are no universally advantageous Tax-Savers. Because each investor has different demands, the investments they make should be considered separately. Please get in touch with us to figure out Tax-Saving plans that match your needs.
| Category | Fund | Ideal Investment Horizon |
|---|---|---|
| ELSS | Invesco India ELSS Tax Saver Fund Gr | 7 Years |
| DSP ELSS Tax Saver Reg Gr | ||
| Franklin India ELSS Tax Saver Gr | ||
| HDFC ELSS Tax Saver Gr | ||
| Taurus ELSS Tax Saver Reg Gr | ||
| Mirae Asset ELSS Tax Saver Reg Gr |
PPF investments are widely considered a safer bet when it comes to investing for tax saving purposes, given their asynchronicity to equity markets. That said, there is a large section of investors that invests in tax saving mutual funds. Let's see how they both fare on various parameters.
The returns offered under PPF presently are around 7-8 % a year. As per the data of last 10 years, tax saving Mutual Funds offer returns in the range of 12 to 14%.
Yes, PPF investments are tax exempted, accumulation and withdrawal included. Tax saving mutual funds, on the other hand, attract 10 per cent LTCG tax. However, the smart investor knows that this levy is subject to the condition that the returns manifested after a holding period of one year exceed Rs. 1 Lakh. Meaning, the amount invested in tax saving funds can be adjusted to keep the returns below the Rs. 1 Lakh threshold and consequently the 10 per cent levy can be avoided.
Also, PPF investments carry a lock-in of 15 years (one can withdraw partially after 5 years), which means the money invested is frozen through the investment tenure. Tax saving funds, on the other hand, have just a 3-year lock-in, making them better on the liquidity front.
Besides this, PPF schemes have an upper ceiling in terms of the tenure and quantum of investment allowed. The maximum tenure allowed under PPF schemes is 15 years with an acceptable extension of another 5 years. The maximum quantum of investment allowed stands at Rs. 1,50,000 a year. Tax saving funds, however, do not carry any such ceiling and grant investors the flexibility needed to save tax as per their monitory obligations.
Most tax-saving investments are accompanied by a mandatory lock-in, wherein the money parked in the investment is frozen from liquidation, meaning the investor cannot maneuver or liquidate units until the conclusion of the lock-in period. Take for example, PPF investments- these come with a mandatory lock-in of 5 years. Tax saving mutual funds, specifically ELSS funds, have the shortest lock-in of 3 years, as opposed to its other tax-saving counterparts. This, however, does not mean that the investor should exit the investment immediately after the lock-in period ends. One can and should continue the acquisition, provided the fund’s performance and its market impact have been declared satisfactory by a certified professional.
If need be, one can re-invest the units redeemed, provided the prevalent market dynamics and the investor’s monetary profile allow, which again shall have to be validated by a professional.
Long story short, keeping the money invested for long durations is the advisable strategy when it comes to Mutual Funds, tax savers or not.
When it comes to deploying funds for tax saving, these days investors are spoiled for choice. They can go for Small Saving Schemes like PPF, EPF, etc, opt for an FD in a bank, or buy a Life Insurance Policy for availing the dual benefit of Tax Saving and Risk Cover.
Why then should one overlook these time-tested options and go for an instrument like Tax Saving Mutual Funds, and expose his hard-earned money to the volatility of markets?
Yes, Tax Saving Mutual Funds can be a tad volatile and selecting or reviewing them does demand a certain know-how, but what they offer in exchange is much more than what they demand.
Firstly, they offer the minimum mandatory lock-in period amongst all Tax Saving Instruments - 3 years to be precise. Secondly, they offer the convenience of deploying and withdrawing money within minutes, in as little as 2-3 clicks. Lastly and most importantly, they offer something all of us want - Better Returns!
Investors can save up to Rs.46,800 (tax deduction of up to Rs. 1,50,000) yearly on taxes by investing in tax-saving mutual funds.
No, senior citizens do not get any additional benefits upon investing in Tax-Saving mutual funds. However, they do enjoy the dual benefit of tax-saving and higher returns.
Investors can track their tax-saving mutual funds on the PRODIGY ProApp. The PRODIGY ProApp helps investors find investment possibilities and execute, track and manage their investments.
LTCG in tax-saving mutual funds like ELSS occurs when the investment is liquidated after the conclusion of the lock-in period, i.e. 3 years.
Yes, investors can make withdrawals from ELSS funds but only after the mandatory lock in period of 3 years.
Yes, investors can make withdrawals from tax-saving mutual funds but only after the conclusion of the mandatory lock in period of 3 years
Tax saving mutual funds have a mandatory lock-in period of 3 years.
