A Mutual Fund can be defined as the fund that collects money from the public and then invests the same in specified securities on behalf of its investors. Mutual Funds can be divided into two categories:
- Equity Mutual Funds: These are mutual funds that are invested in equity shares.
- Debt Mutual Funds: These are mutual funds that are invested in debt/fixed income earning instruments.
What are Tax Saving Mutual Funds?
Tax saving mutual funds are similar to other mutual funds but have an added tax-saving benefit. These mutual funds are eligible for tax benefits under section 80C of the Indian Income Tax Act. Most of the tax-saving mutual funds are ELSS schemes (Equity-linked Savings Scheme) that makes investments in the growth-oriented equity market.
Section 80C Tax Benefit of Investing in ELSS Schemes
ELSS schemes have a lock-in period of 3 years. It means that the investment cannot be withdrawn until the end of the maturity period. Although there is no limit for investing in these mutual funds, the maximum amount of deduction that can be claimed under Section 80C for investing in these mutual funds is Rs 1,50,000. This deduction of Rs 1,50,000 is the total cumulative deduction which is allowed in any financial year for investments in several specified instruments. Some of the popular instruments under which deduction under section 80C can be claimed are PPF accounts, pension plans, life insurance policies, National Savings Certificate, etc.
Types of Equity-linked Savings Scheme (ELSS)
There are two types of schemes under the ELSS- dividend scheme and growth scheme. Dividend schemes allow investors to get an extra income in the form of dividends from time to time as per the availability of the distributable surplus whereas the growth schemes generate long-term capital appreciation for the investors that can be redeemed at the end of the maturity period. The dividends are not subjected to lock-in periods and can be withdrawn and reinvested in the fund and will be eligible for income tax benefits. However, there are no such provisions for growth schemes.
Features of Tax Saving Mutual Funds
The features of the ELSS schemes that make them a profitable investment option for the investors are listed below.
- If you can’t afford to invest large sums in the fund then you can start investing in ELSS with Rs 500 only.
- Investments under the tax saving mutual funds come with a lock-in period of 3 years.
- Although there is no upper limit of investments, only investments worth Rs.100,000 are eligible for tax benefits.
- Investments made in ELSS schemes are prone to market risks which can be either low, medium, or high based on where the funds are invested.
- ELSS mutual funds are open-ended in nature.
- These mutual funds offer nomination facilities to the subscribers.
- Most ELSS schemes come with entry and exit loads. These are the fees that are charged by the providers on purchase, sale, redemption, or transfer of the fund units by the investors.
Benefits of Tax Saving Mutual Funds
Tax saving mutual funds have a number of benefits. Some of them are listed below.
- The investments made in these funds are eligible for tax benefits of up to Rs 1.5 lakh.
- The long term capital gains under these schemes are not taxed.
- Investors can invest monthly via best SIP plans (Systematic Investment Plan) thereby nullifying the need to invest in one go.
- Investments made in these schemes can be used for future expenses like buying a car or paying the down payment for a house.
- The portfolio assets are kept diverse so as to minimize the risk of massive losses.
- If you do not withdraw your investment, it will continue to grow and turn into a good amount of savings one day.
- Although you can withdraw the principal amount, you can withdraw the dividends earned in the lock-in period.
- While other investment options come with a lock-in period of 6-15 years, these Best mutual funds have a lock-in period of only 3 years.
- Owing to its open-ended nature, investments in these schemes can be made all year round.
- These funds are managed by experienced fund managers who have thorough knowledge about the market. Thus, investors who do not have any market knowledge can invest in these funds.
Best Tax Saving Mutual Funds in India
- IDFC Tax Advantage (ELSS) Fund Growth
- Tata India Tax Savings Fund Growth
- L&T Tax Advantage Fund Growth
- Aditya Birla Sun Life Tax Relief 96 Fund Growth
- DSP BlackRock Tax Saver Fund Growth
- Axis Long Term Equity Fund Growth
- Kotak Tax Saver Fund Growth
- Invesco India Tax Plan Fund Growth
- Aditya Birla Sun Life Tax Plan Growth
- HDFC TaxSaver Fund