Mutual funds are a pooled investment instrument that invests in a diversified set of assets on behalf of its unitholders. Since the fund is professionally managed, unitholders can rest assured that their money is set to grow. The mutual fund industry has seen a 2x growth in the last five years, making mutual funds one of the most attractive investments. Amongst the other benefits offered by mutual funds is tax efficiency. Investments in mutual funds are eligible for deduction under Sec 80 C of the Income Tax Act.
What is Sec 80 C of the Income Tax Act?
The Finance Act of 2005 introduced Section 80C. The purpose of this section is to provide deductions from total income on account of various expenses/payments, which in turn reduce the tax liability of an individual. There is an upper limit to the deduction under this section of INR 1.5lakhs.
Which are the tax saver mutual funds?
While all mutual funds offer some tax benefits, Sec 80C only applies to a specific category of mutual funds. In accordance with Section 80C, equity-linked savings schemes (ELSS) are eligible for deductions.
What are ELSS mutual funds?
ELSS is a type of mutual fund whose portfolio comprises majorly of equity and equity-linked securities. Investments in ELSS can help you achieve your goals of tax saving as well as wealth creation. ELSS is covered by Sec 80C of the Income Tax Act, and thereby you can save up to INR 46,800 in taxes by investing in the fund. ELSS, which offers a low lock-in period of 3 years, attracts investors by offering attractive returns through the predominance of equity investments. Compared to the other Sec 80C instruments, ELSS has the potential to offer higher returns than inflation.
Types of ELSS
Funds targeting dividends and growth are the two broad categories of ELSS funds.
Growth Funds
Investors can create long-term wealth by investing in Growth Funds. When the fund is sold, you can realize the entire value.
Dividend Funds
Two subcategories of dividend funds: dividend payouts and dividend reinvestments. When you opt for Dividend Payout, you will receive tax-free dividends. When you choose Dividend Reinvestment, dividends are reinvested into a new investment.
When investing in ELSS, what factors should you consider?
To take a wise call about investing in ELSS mutual funds, you need to consider the following factors:
Duration of investment:
If you plan to invest in ELSS funds, you will need a holding period of more than five years. Because ELSS funds are exposed to equity market volatility, you need a longer investment horizon in order to minimize your risk.
Return expectations:
ELSS funds have no guarantee of returns because their performance is entirely based on the performance of the securities they invest in. However, a longer investment period can provide higher returns than any other tax-saving investment.
Lock-in:
A lock-in period of three years applies to ELSS mutual funds. As soon as you invest, your holdings are locked-in for three years, and you will not be able to redeem them before the expiration of this period.
Best ELSS mutual funds
Here’s a list of top-performing ELSS mutual funds:
| Name | 3 Year CAGR | 5 Year CAGR | Rating |
| Quant Tax Plan Fund | 40.14% | 25.73% | 5 star |
| Mirae Asset Tax Saver Fund | 25.51% | 21.15% | 5 star |
| BOI Axa Advantage | 29.21% | 20.37% | 5 star |
| IDFC Tax Advantage ELSS Fund | 25.75% | 19.10% | 4 star |
| Kotak Tax Saver Fund | 22.24% | 16.40% | 4 star |
| DSP Tax Saver Fund | 24.08% | 16.73% | 4 star |
| UTI Long Term Equity Fund | 22.06% | 15.69% | 4 star |
FAQs
Equity Linked Savings Schemes (ELSS) are tax-free under Section 80C. Investing in ELSS mutual funds can result in a tax rebate of up to ₹ 1,50,000. Tax-saving funds, like ELSS, are ideal for individuals looking to save taxes while aiming for long-term wealth creation through equity investments. Tax-saving mutual funds, such as ELSS, allow investors to claim deductions under Section 80C of the Income Tax Act while investing primarily in equity and equity-linked securities. These funds offer the potential for higher returns over a lock-in period of three years.Which SIP is Tax-Free Under 80C?
Who Should Invest in Tax Saving Funds?
How Do Tax Saving Mutual Funds Work?
