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Saving Tax through Mutual Fund Investments Research Team | Posted On Tuesday, April 16,2019, 04:25 PM

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Saving Tax through Mutual Fund Investments



To invest, you must have money in hand. To have money in hand, you must save. To save, you must have a sizeable income and saving is not everyone’s cup of tea. Saving is easier said than done. Saving for the sake of it might not motivate you set, short and long term goals. Having financial goals would compel you to save.

Once you have money in hand, the next thing to worry about is where to invest? With a wide range of options available, people find it difficult to identify the right investment option.

Investing in schemes covered under Section 80C of the Income Tax Act, offers tax deductions of up to Rs 1,50,000 a year. This covers various investment schemes like EPF, PPF, Tax Saving FDs, ELSS, NSC and so on.

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Saving Tax through Mutual Fund Investments

What Are Equity Linked Savings Schemes?

Equity Linked Savings Scheme, ELSS, is a type of mutual fund, specifically designed to save taxes under Section 80C of the Income Tax Act. Investing in ELSS offers tax deduction of up to Rs 1,50,000 a year. ELSS offers twin benefits of capital appreciation and tax deduction.

ELSS invests mostly in stocks. ELSS has statutory lock-in period of 3 years. The returns earned on ELSS if held for over a year, are subject to long term capital gains tax at 10%. 

ELSS Options

i) Growth option

Under growth option, the holder would not receive benefits in the form of dividends. These are reinvested in the scheme. This helps in capital appreciation. The catch is that these returns are subject to market conditions which may or may not go in the favor of investors.

ii) Dividend Option

Under the dividend option, holders would receive periodic dividend payouts. Dividends are fully tax exempt in the hands of the investors.

iii) Dividend Reinvestment Option 

Under this option, investors can reinvest the dividends received. This is a good option when the market is performing well and is likely to continue this way.

SEE ALSO:  How Mutual Funds Invest Your Money?

Features Of ELSS

  • ELSS is an equity diversified mutual fund which invest in stocks.
  • ELSS funds have a lock-in period of 3 years. This means you are not allowed to exit ELSS funds for 3 years. Lock-in period for ELSS funds is lower than all other tax saving investment options under Section 80C.
  • Well performing ELSS Funds have given annualized returns of 15-17%.
  • You can start investing in ELSS both online and offline.
  • ELSS offers flexibility in investments. You can invest a lump sum or invest via systematic investment plan, SIP.
  • You can start investing as low as Rs 500 a month and you are allowed to invest as much as you want in ELSS. But, tax benefits would be capped to a maximum of Rs 1.5 Lakhs.
  • ELSS funds do not have entry or exit load.
  • Expense ratio of top ELSS funds ranges from 2-3%.

Advantages Of Investing In ELSS

  • ELSS is equity oriented funds and dividends declared under ELSS are tax exempt.
  • Compared to other tax saving investment options like 5 year tax saver FD, the lock-in period of ELSS is much lower and offers higher returns.
  • Considering the lock-in period of ELSS funds, fund managers are less worried on the outflow and this leads to better performance of these funds.
  • Systematic Investment Plans or SIP in ELSS brings discipline in investing and removes the risks of timing the markets.
  • You have an option of not redeeming after 3 years. You can continue in the scheme and earn benefits from long term growth.

Disadvantages Of ELSS

  • The portfolio construction of ELSS schemes is similar to other equity related schemes. Hence, these are exposed to market risks.
  • Your funds would be locked for a period of three years.
  • Unlike fixed deposits, there are no premature withdrawals. There is no option of paying penalty and withdrawing the investment. Your money is locked for three years once invested in ELSS.

Tax Savings Through Retirement Funds

There are mutual fund houses offering retirement funds meant for building a corpus for retirement and also enjoy tax benefits under Section 80C of the Income Tax Act. The catch is these funds have a lock-in period of 5 years or till the retirement age of the investor, whichever is earlier.

As an investor, you can achieve twin goals of retirement planning and tax savings with retirement funds. A point to note here is that investors must check if a particular fund offers tax benefits as not all retirement funds offer tax benefits.

SEE ALSO: How To Invest In Mutual Funds For 2018-19?


Investing in ELSS is one of the best tax saving investment options around. You must carefully understand terms and conditions. Remember that you are not allowed to withdraw from ELSS up to three years. You cannot rely on this for meeting emergency expenses. Don’t rush to invest in ELSS at the fag end of the financial year just to save tax. You can also invest in ELSS through SIP.

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