Investing in mutual funds, types of investment, ELSS tax saving mutual funds, mutual funds, mutual fund investment, invest in mutual funds, types of mutual funds, tax saving mutual funds
If you are an earning individual, you must be well aware that you are expected to give a part of your income by paying tax. Nobody likes it, we get it. But what if you can save on taxes while growing your capital. Equity-Linked Savings Scheme, also known as ELSS funds helps you do the same. Let’s quickly recall what are ELSS funds.
What are ELSS funds?
ELSS mutual funds are equity funds that invest a majority of their portfolio, at least 80% of their assets in equity and equity-related securities. What makes ELSS mutual funds different than other equity funds is that these mutual funds provide a tax deduction of up to Rs 1.5 lac under Section 80C of the Income Tax Act, 1961. As an investor, you can save up to Rs 46,800 by investing in ELSS funds provided that you belong to the highest tax slab.
Why you should invest in ELSS funds?
Following are the top four reasons why you must consider investing in ELSS tax saving mutual funds:
1. You can create wealth while saving tax:
As ELSS funds invest predominantly in equity and equity-related investments, they have a huge potential to provide significant returns.
In fact, historically, ELSS mutual funds have provided double-digit returns to investors when invested for a prolonged duration. What’s more, while these funds have a huge potential to offer significant returns, they also help in saving tax. Hence, these tax-saving mutual funds provide the dual benefits of tax saving and capital appreciation to investors.
2. ELSS tax saving mutual funds have the lowest lock-in tenure:
ELSS scores over other tax-saving investments in terms of the lock-in period. ELSS mutual funds have the shortest lock-in period of just three years against any other tax-saving investments. Let’s look at the lock-in duration of other tax-saving investments:
| Investment option | Lock-in tenure |
| Public Provident Fund (PPF) | 15 years |
| National Savings Certificate (NSC) | 5 years and 10 years |
| Unit-linked Insurance Plan (ULIP) | 5 years |
| Tax-saving Fixed Deposits (FD) | 5 years |
| Equity-Linked Savings Scheme (ELSS) | 3 years |
3. SIP investment option:
Just like any other type of mutual fund, you can invest in ELSS funds via a Systematic Investment Plan (SIP). SIP allows investors to invest in mutual funds a small, insignificant, pre-determined amount on a periodic basis for a given period of time. This type of investment is ideal for investors who do not have a significant, sizeable corpus at the moment but are expected to receive regular cash inflows.
4. Taxation on mutual funds help you to save more:
As ELSS funds have a mandatory lock-in period of 3 years, these funds are just subject to long-term capital gains (LTCG) tax. LTCG tax of up to Rs 1 lac per annum is exempt from tax. Any gains above Rs 1 lac are charged at 10% p.a.
The incentive to save tax along with the potential of capital appreciation and the benefits of mutual funds makes ELSS mutual funds an ideal tax-saving investment option. Ensure that you choose the right ELSS fund for your portfolio. The right type of mutual fund is the one that aligns with your investment portfolio. Happy investing!