What Are Tax Saving Mutual Funds?

If you think mutual funds help generate wealth by offering substantial returns, that's not all they do. A certain type of MF also helps you save tax. Sounds unfamiliar? Allow us to weigh in! While it's true that returns from most MFs are taxable, the ones from equity-linked savings schemes present a different story.

We're not saying these funds are entirely tax-free, but you can claim a substantial tax deduction on them, the details of which are explained below.

What is an Equity-linked Savings Scheme (ELSS)?

Also called tax saving MFs, the equity-linked savings scheme invests its majority corpus in equity or equity-linked instruments. What makes this fund popular is that you can claim a tax rebate of up to Rs. 1,50,000 on it. You can file the exemption under Section 80C of the Income Tax Act (ITA).

This tax saving mutual funds comes with a mandatory lock-in period of three years. If you think this is a bothersome restriction, think again. Countless investors have found that this mandate has allowed them to inculcate financial discipline.

Anyway, market experts advise you to stay invested in this type of MF for at least 5 to 7 years. Why? Since these funds invest most of their stake in equity or stocks, they offer a moderate to high risk exposure.

To balance this out, a long-term investment is ideal. Several investors have observed that a long-drawn deposit in this MF offered them substantial returns compared to other tax-deductible instruments under Section 80C.

Additional Read: What Are ELSS Funds?

Who Should Invest in a Tax Saving Mutual Fund?

Tax-saving mutual funds are ideal for individuals looking to combine tax benefits with wealth creation. If you fall under a taxable income bracket and wish to save taxes under Section 80C of the Income Tax Act, these funds are a great choice.

ELSS is particularly suitable for long-term investors willing to accept a moderate level of risk, as it primarily invests in equities. Those planning for future financial goals, like education or retirement, can also benefit from the dual advantage of tax savings.

Why Should You Invest in a Tax Saving Mutual Fund?

Tax-saving mutual funds offer a dual advantage of tax deductions and wealth generation. With a relatively short lock-in period of three years, ELSS provides greater flexibility compared to other tax-saving options.

The potential for higher returns through equity investments further enhances its appeal for long-term financial growth.

How to Invest in a Tax Saving Mutual Fund?

Investing in tax saving mutual funds is simple and straightforward. You can invest directly through a fund house or via online platforms like Tata Capital Moneyfy to research and invest in funds of your choice. 

Once you complete the KYC process, you can select a suitable fund based on your objectives and risk tolerance.

Features of Equity-linked Savings Scheme (ELSS)

Before extending your financial portfolio to include this type of MF, make sure you know the following:

• This MF diversifies funds across different sectors and market capitalisations – small-cap, mid-cap, and large-cap. 
• Other than the lock-in period of 3 years, these funds have no cap on upper tenure.
• They invest a minimum of 80% corpus in equity-linked instruments.
• Investors don’t need to set aside a significant investible amount as several equity-linked savings schemes allow investments starting from just Rs. 500.
• After the lock-in period is over, you can redeem these units to receive long term capital gains on them. These gains are not taxable up to Rs. 1,00,000 in a financial year. After which, you pay a 10% tax on them. These numbers will readjust depending on whether you claim earnings from these MFs under Section 80C.

Additional Read: When is the Right Time to Sell Your ELSS Investment?

The bottom line

Financial experts consider equity-linked funds as a great way to dabble into equity MFs. Due to a 3-year lock-in, it provides you with an initial taste of market volatilities and risk factors. Often, investors gain valuable experience of the equity market through these funds and go on towards investing in high risk and return equity MFs.

Want to start your Mutual fund portfolio online? If yes, then partner with Tata Moneyfy's Mutual Fund app. We provide a user-friendly digital portal through which you can compare and apply for MFs, SIPs and other financial instruments.

Click here to read about our services or start an investment now!

FAQs

What is a tax saving mutual fund?

A tax saving mutual fund, like an ELSS (Equity Linked Savings Scheme), is a type of mutual fund that offers tax benefits under Section 80C of the Income Tax Act, with a 3-year lock-in period.

Is it worth investing in tax saver mutual funds?

Yes, tax saver mutual funds offer dual benefits of tax savings and potential wealth creation through equity investments. They are suitable for individuals with a moderate-to-high risk tolerance seeking tax-efficient returns.

How do I check if my mutual fund is a tax saver?

A mutual fund is a tax saver if it is explicitly categorised as such, like an ELSS fund. You can check the fund’s name, brochure, or scheme details for tax-saving features and compliance with Section 80C.

How to choose a tax saver mutual fund?

You can choose a tax saver mutual fund by evaluating past performance, fund manager expertise, expense ratio, portfolio allocation, and risk level. It is important to align your fund choice with your financial goals and risk appetite.

What is the difference between tax saver mutual fund and normal mutual fund?

Tax saver mutual funds offer tax deductions under section 80C and typically come with a lock-in period. Normal mutual funds lack these benefits but offer more flexibility in withdrawals and investment types.