What are Tax Saving Mutual Funds?


One of the most popular Sec 80C investment options is tax saving mutual funds also known as ELSS Funds or Equity Linked Savings Schemes.

What are tax saving mutual funds

A tax saving mutual funds or ELSS fund is a type of diversified equity mutual fund which has a majority of the corpus invested in equity or equity related investments. Since it is an equity fund, returns from a tax saving mutual fund reflect returns from the equity markets.

Tax saving mutual funds is open ended mutual funds which not only helps you to save taxes, but also gives you an opportunity to grow your money. It qualifies for tax exemption under section 80C of the Indian Income Tax Act, 1961, and offers the twin advantage of capital appreciation and income tax benefits. It comes with a lock-in period of 3 years.

Tax saving mutual funds or ELSS Funds are one of the best avenues to save taxes under Section 80C, because along with the tax deduction, the investor also gets to see the sunny side of investing in the equity markets. Also, no tax is levied on the long-term capital gains from these funds. Dividends paid by ELSS funds are also tax free. Moreover, Tax saving mutual funds has the shortest lock-in period of three years compared to other tax saving options.

Tax saving mutual funds is the kind of investment that does not have any age limit. One can start as young as possible. ELSS is also for the kind of investors who do not believe in putting all eggs in one basket. One may choose to invest in the top 3 or 4 top performing ELSS funds and can get the best kind of returns over long period of time.

Tax implications of tax saving mutual funds

ELSS mutual funds also have an added advantage as they fall under ‘EEE’ (Exempt-Exempt-Exempt) category, which means the amount you invest in an ELSS fund is tax exempt, the returns and dividends received are also tax exempt and when you redeem the amount received along with profits are tax exempt too. However, in some other tax-saving avenues like NSC or tax saving FDs, the amount invested is only tax-free but the interests received are not.

One can invest up to Rs. 1.50 Lakhs in tax saving mutual funds in a financial year in order to get tax benefit. However, there is no maximum limit on investment as the excess amount over Rs. 1.50 Lakhs won’t qualify for tax benefit under section 80C.

Tax saving of up to Rs 46,350 can be achieved by making an investment of Rs 1,50,000 where the investor falls in the top income tax slab of 30 percent (inclusive of applicable cess of 3 percent). However, the tax saving may differ depending on applicable tax slab of an individual and moreover, the investments made under section 80C of the Income Tax Act 1961.

Comparison of popular tax saving options

Benefits of investing in Tax Saving Mutual Funds

1) ELSS can be availed by any persons from any background including business owners, senior citizens, professionals and salaried individuals.

2) Long term wealth creation can be enjoyed by means of capital appreciation and tax free earnings.

3) Investment can be started with a small amount of Rs 500 through monthly

4) Minimum lock-in period of just 3 years which is considerably the least in comparison to other tax saving investing options.

5) Earnings i.e. the dividends received (in case of dividend payout option) and capital appreciation are 100% tax free under long term capital gains taxation for equities and equity mutual funds.

6) The concept of compounding will help you to earn in multiples of the principal amount invested.

7) There is no maximum limit to invest.

Tax Saving Mutual Funds not only saves taxes for you but can be used for channelizing your investments towards long term future goals.

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