Tax Saving Mutual Funds
Tax saving plays an important role in your financial journey and investment success. Everyone wants to reduce their tax outgo and save for future goals. There are many investment products that qualify for tax deduction under Section 80C of the Income Tax Act, 1961.
One such investment product is tax saving mutual fund also referred to as Equity Linked Savings Schemes (ELSS). Tax saving mutual funds are a popular and most preferred tax investment avenue due to their potential to generate higher returns, ease of investing, flexibility, and a lower lock-in period. ELSS is not just a mutual fund for tax benefits but also a great investment avenue for long-term capital appreciation. Let’s know about tax-saving mutual funds in detail.
What are Tax Saving Mutual Funds?
Equity Linked Savings Schemes or tax saving mutual funds are the equity mutual funds that invest the majority of their corpus into a diversified portfolio of stocks. ELSS funds offer tax benefits under Section 80C of the income tax act and are locked in for 3 years.
That means you cannot redeem your ELSS investments within three years of investment. However, tax-saving mutual funds are designed for long-term goals being equity-oriented funds. Let’s take a look at the amazing benefits offered by the Equity Linked Saving Schemes.
Benefits of Tax Saving Mutual Funds
The following are the benefits of investing in the best tax saving mutual funds:
Tax benefit: Investments made into tax-saving mutual funds qualify for tax deduction under Section 80C of the Income Tax Act, 1961 for up to INR 1,50,000 a year. Compared to all other tax-saving investment avenues, this is the only investment avenue that has the potential to grow your wealth significantly along with offering tax benefits. It is also important to note that, long-term capital gains from ELSS funds are exempt from tax if the gains are below INR 1 lakh a year and the gains above INR 1 lakh are taxed at the rate of 10%, which makes it a tax-efficient investment option.
Higher Returns: As ELSS funds predominantly invest in diversified portfolios of stocks, it has the potential to deliver higher and inflation-adjusted returns over the long term. When you invest in the best tax-saving mutual funds for a long-term horizon, you can enjoy the benefit of compounding. ELSS funds can perform extremely well over the long term with a CAGR of 15% to 20%. This makes tax-saving mutual funds stand out in comparison to other traditional tax-saving options.
Lowest lock-in period: Equity Linked Savings Scheme comes with a lock-in period of 3 years which is the lowest in comparison to other tax-saving avenues. That means ELSS funds do not restrict you to redeem after completion of 3 years which makes them relatively liquid. However, it is not compulsory to redeem tax-saving mutual funds after the completion of three years lock-in periods. You need to exit from the investment only based on your investment need and stay invested for long to reap the maximum benefit.
Flexible: ELSS funds are extremely flexible like any other mutual fund. You don’t need to rush at the end of the financial year. You can invest systematically throughout the year via SIP. This also brings discipline to your investment practice. Set aside some portion of your monthly income in the best tax-saving funds via SIP.
You invest in any best tax-saving mutual funds online without any paperwork. Investing online is safe and transparent also. However, while investing in any tax-saving mutual funds you need to do thorough research on its past performance, return consistency and portfolio constituents, etc. Let’s take a look at the performance of some of the best tax-saving mutual funds.
Best Tax Saving Mutual Funds
| Fund Name | Returns | Expense Ratio | ||
| Since Inception | 3-years | 5-years | ||
| Quant Tax Plan | 21.99% | 52.41% | 33.92% | 0.57% |
| Mirae Asset Tax Saver Fund | 22.19% | 32.16% | 23.85% | 0.43% |
| Canara Robeco Equity Tax Saver Fund | 16.97% | 32.21% | 23.78% | 0.76% |
| Invesco India Tax Plan Fund | 18.90% | 28.66% | 20.69% | 0.88% |
| UTI Long Term Equity Fund | 15.55% | 29.89% | 20.35% | 1.15% |
| DSP Tax Saver Fund | 17.88% | 28.56% | 20.18% | 0.84% |
| Axis Long Term Equity Fund | 20.31% | 25.79% | 19.98% | 0.74% |
| Kotak Tax Saver Fund | 16.17% | 27.63% | 19.84% | 0.73% |
| Tata India Tax Savings Fund | 16.50% | 25.49% | 18.36% | 0.75% |
| HDFC Tax Saver Fund | 13.40% | 23.67% | 14.66% | 1.25% |
Along with the performance of the fund, comparing the expense ratios as the cost of the fund can have a significant impact on its return. Every ELSS follows its own investing style, choice of market cap, and growth focus. It is important to remember that any of your investment decision should be based on your financial goals, desired asset allocation as per your risk appetite and time horizon to reach your goals.
