Key Benefits of Tax Saving Mutual Funds

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Understanding about Equity Linked Savings Scheme (ELSS) i.e. tax saving mutual funds may prove crucial in your tax saving endeavor this financial year. Deciphering ELSS as the prudent investment cum tax saving option can not only help you save but also grow your wealth.

As you must be aware, investments in ELSS qualify for tax benefits upto Rs 150,000 under Sec 80C of IT Act, 1961. This implies that for investors falling under the highest tax bracket can save upto Rs 46,800 in taxes. You can invest more than the prescribed amount, however, the excess amount does not qualify for tax benefits. As per the latest tax revisions, Capital gains and Dividend payout from ELSS are subject to 10% tax only if the gains exceed Rs 1 Lakh. Despite these changes, Tax Saver mutual fund still remains the most popular investment option under Sec 80C.

Key benefits of tax saving mutual funds in detail

Since Tax Saving mutual fund invest in equity markets, it has dual benefits. These tax saver funds not only saves you tax but also reap comparatively better returns if invested for a longer duration. Past history of investment in tax saving mutual fund depict returns of ~ 12% for 10 years when compared to PPF, NSC and other 80C tax saving instruments (Source: Bloomberg – ELSS Returns Structure).

A shorter lock-in of 3 years acts as a boon since equity investments invested for longer duration offer better returns as compared to quick sell off considering volatility.

Shortest lock-in period ensures high liquidity. ELSS comes with 3 years lock-in period when compared to other tax saving instruments is on the lowest side. You may continue to stay invested beyond 3 years thus improving your chances of better returns.

ELSS scores over ULIP
Benefits of ELSS over ULIP is that though both are market linked, ELSS have an option to switch funds in case you’re not satisfied with the result and does not have multi-year commitment clause. In addition, investments can be made in easy monthly instalments called SIP. Lump sum investment, though the option is always available for investors who wish to invest in one shot.

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