Tax Saver Funds

By investing in ELSS mutual funds, you allow yourself to earn high returns on your investments. Since these funds invest majorly in equity instruments, they have the potential to provide inflation-beating returns in the long term. Also note that mutual funds are managed by professional fund managers and hence, are less risky.

ELSS mutual funds come with a lock-in period of only three years, which is the shortest among all investment instruments that qualify for tax benefits under section 80C. It means that these funds offer you the maximum liquidity as compared to other 80C investment avenues. You can withdraw your investments anytime after the completion of the first three years.

ELSS mutual funds allow you to take a disciplined approach to investing. You can invest in ELSS funds through a Systematic Investment Plan (SIP) or lump sum. If you opt for the SIP method, you will be able to invest fixed amounts in ELSS funds at a fixed date every month. You can start your ELSS SIP for as low as Rs. 500 per month.

As you know, ELSS mutual funds come with the shortest lock-in period among all other tax-saving investment instruments that qualify under section 80C. Below is a comparison between tax saving mutual funds and other popular 80C instruments, such as Public Provident Fund (PPF), National Pension System (NPS), and Tax-Saving Fixed Deposits (FDs).

ELSS funds or tax saving mutual funds allow you to gain tax benefits of up to Rs. 1.5 lakhs and get superior returns on your investments. However, as an investor, you must consider several factors before making an ELSS investment. These include:

• Risk-return Ratio

  You should always evaluate the risk-return ratio before investing in any instrument and make sure that it aligns with your investment goals and risk appetite. Since ELSS mutual funds are equity-oriented funds, they carry higher risks than other 80C investment instruments. At the same time, they have the capability to deliver superior returns in the long run.

• Lock-in Period

  Another thing that you should remember before investing in an ELSS fund is that it comes with a lock-in period of three years. It means that you are not allowed to withdraw your investments in these funds before the completion of the first three years. However, the lock-in period for ELSS is the shortest among all other investment instruments that qualify under section 80C.

• SIP or Lump Sum

  You can invest in ELSS mutual funds in two ways - through a Systematic Investment Plan (SIP) or a lump sum method. While an SIP allows you to make fixed investments at fixed intervals, the lump sum method allows you to make one-time investments in mutual funds. You need to select an appropriate method as per your investment needs.

As ELSS mutual funds are categorized as equity-oriented funds, returns from them are taxed accordingly. Any dividend received from these funds is added to your annual taxable income and taxed as per the applicable income tax slab rate. Until 2020, dividends received from equity mutual funds were tax-free in the hands of investors.

Since ELSS funds come with a lock-in period of three years, the probability of getting Short-Term Capital Gains (STCG) is ruled out. Hence, returns from ELSS mutual funds are taxed as per Long-term Capital Gains (LTCG) taxation rules. It means that gains of up to Rs. 1 lakh are tax-exempted, whereas gains exceeding this limit are taxed at a 10% rate without any indexation benefits.

ELSS mutual funds are equity-oriented funds. Hence, they are naturally influenced by market movements. That is why the risks associated with them are usually very high. However, you can easily mitigate these risks by staying invested in the funds for a long term of five years or more. The mandatory lock-in period of three years also helps in reducing these risks.