Tax Saving Mutual Funds or ELSS- Features, Tax Benefits and How to Invest?

Mutual funds have become popular among investors because they offer the dual benefit of tax savings and healthy returns. They provide higher returns than traditional modes of investment such as fixed deposits and other government schemes while posing less risk than purchasing individual company shares. Here is what tax saving mutual funds are, its features and tax benefits.

What are Tax Saving Mutual Funds?

The only type of mutual fund eligible for tax deductions under Section 80C of the Income Tax Act of 1961 is an ELSS fund or an equity-linked savings scheme. By investing in ELSS mutual funds, you can claim a tax rebate of up to Rs 1,50,000 and save up to Rs 46,800 in taxes per year.

Features of ELSS Mutual Funds

• At least 80% of the total investible corpus is allocated to equity and equity-related instruments.
• The fund invests in equity in a diversified manner, across various market capitalizations, themes, and industries.
• There is no maximum investment tenure.
• There is a three-year lock-in period.
• Section 80C of the Income Tax Act provides for a tax exemption on the amount invested.
• Income is classified as LTCG and taxed in accordance with the applicable tax rules.

How to invest?

Investors can choose to invest in ELSS funds via monthly SIPs (systematic investment plans). The minimum monthly investment through a SIP can be as low as Rs 500.

What are the tax benefits of these mutual funds?

Tax deductions of up to Rs 1.5 lakh per year are available for investments in tax-saving mutual funds such as ELSS under Section 80C of the Income Tax Act. ELSS funds have a three-year lock-in period, which is one of the shortest of any 80C investment. You can invest in tax-advantaged mutual funds through a systematic investment plan (weekly, monthly, quarterly, semi-annually, or annually) or in one lump sum. Because these funds are invested in equity-linked instruments, they may generate reasonable long-term returns.