How to Save Tax with Mutual Funds?

It is a fact that income tax often takes a sizeable portion out of your earnings. As a result, it is a financially sensible decision to opt for suitable investments that can help in saving taxes. In fact, tax planning ensures that you make prudent investments so as to decrease your tax obligations, allowing you to save more of your income. For this to happen, you need the right financial instrument for saving taxes. Mutual funds can be an excellent choice as a tax saving investment.

Of the various kinds mutual funds in the market, the best option for tax saving is ELSS. Here is a short guide to ELSS.

What is ELSS?

ELSS is short for Equity Linked Savings Scheme and they are mutual funds designed for saving on taxes. As per Section 80C, ELSS can be used for saving up to a maximum of 1.5 lakh rupees on income tax. However, they come with a lock-in period that lasts for 3 years. These mutual funds tend to invest most of their portfolio in the stock market.

How to Invest In ELSS?

It is possible to make investments in ELSS via the website of the fund company. You can certainly make the investments in a lump sum. However, it is more sensible to use Systematic Investment Plans or SIP. They enable you to balance out your investments. However, you must remember that every SIP will be considered to be a new investment. More importantly, each SIP will have its own lock-in period lasting 3 years.

What Are the Risks of ELSS Funds?

It is not possible for an ELSS fund to guarantee any returns. After all, their earnings are dependent on the investments made in the equity market. In other words, they carry a high risk. Be that as it may, it is certainly possible for the risk to pay off. In fact, funds with the best performance can generate sizeable returns in the long run. In fact, the returns are good enough to overcome inflation as well. Other tax saving instruments such as fixed deposits and PPF are incapable of providing these benefits.

The Investment Limits

The minimum amount required for investing in ELSS funds is 500 rupees only. There is no stated maximum limit. In other words, you can invest as much as you want in ELSS. However, the maximum tax benefit you will get is 1.5 lakh rupees each year.

The Investment Tenure

The lock-in for ELSS funds is 3 years. However, it is possible to remain invested in them without any further contributions for any period of time. You may also choose to make contributions. As for an ELSS SIP, it can be stopped any point of time. However, the invested amount can only be withdrawn after a period of 3 years. It is important to remember that premature redemptions are not possible in ELSS. You need to wait for the lock-in period to be over.

As a tax saving investment, ELSS is a fantastic choice. However, you must make sure that you have gone through all the details before investing.