Investors seek investment opportunities to receive regular returns, create long-term wealth and save taxes. While many investment avenues generate profits, they are taxed as per the Income Tax laws.

However, an investor can legitimately save income tax by investing in popular tax saving investments. One such best tax saving option is the  Equity Linked Savings Scheme or ELSS funds. This article explains about tax-saving mutual funds and their various aspects to help you make an informed investment decision.

Tax saving mutual funds like ELSS are similar to any other mutual fund scheme with an added advantage of saving tax. These funds help investors (Individual and HUF) save taxes under Section 80C  of the Income Tax Act, 1961. Investing in ELSS qualifies for a tax deduction of up to Rs.1.5 lakh.

Tax-saving mutual fund typically invest in the growth-oriented equity market. This enables investors to earn potential good returns and help create long-term wealth.

Tax-saving mutual funds collect money from multiple investors and predominantly invest it in the equity market. Tax saving mutual funds like ELSS have a lock-in period of three years, until which you cannot withdraw your investments. When you choose to invest in mutual funds via the SIP route, the lock-in period for each instalment is three years.

For example, if you make the 1^st SIP instalment on 1^st May 2019 and the 2^nd instalment on 1^st June 2019, the 1^st instalment will stay locked until 1^st May 2022, and the 2^nd instalment will remain closed till 1^st June 2022.

When redeeming your mutual fund units, you can only redeem the units that have completed lock-in period. These can be redeemed at the current  Net Asset Value (NAV).

Tax saving mutual funds are categorised into two types – dividend option and growth option.

The  dividend option can enable you to benefit from timely dividends declared by the fund house when there is a distributable surplus. Dividends shall be taxable in the hands of the investors on the income-tax slab without a lock-in and the mutual fund will deduct tax at source at applicable tax rates before payouts/re-investment. However, the Investor can claim tax credit of taxes deducted at source at the time of filing of their annual return.. Therefore, the same can be withdrawn or reinvested in the fund as per your choice.

The growth option does not provide a dividend benefit, but it generates long-term capital appreciation. These can be redeemed at the time of completion of lock-in period.

• ELSS funds predominantly invest its corpus (around 80%) in equity and equity-related instruments. The investments are diversified across various market capitalizations (i.e. large-cap, mid-cap, small-cap and multi-cap) and sectors (such as pharmaceutical, banking, FMCG, aviation, healthcare, etc.).
• You can invest in ELSS tax-saving funds with a minimum amount of Rs.500.. There is no upper limit for investment. However, the tax benefit is available only up to Rs.1.5 lakh per annum.
• Investments in tax-saving mutual funds have a lock-in period of three years. Besides, there is no maximum tenure of investment.
• A typical ELSS plan comes with the exit load when you join the fund or sell/transfer your units before its maturity.
• Tax-saving mutual funds are subject to market risks.
• Gains from ELSS funds held for more than 12 months attract long-term capital gains tax at 10 per cent (plus surcharge as applicable plus 4% Health & education cess) if the total long term capital gains amount from equity oriented mutual funds/ equity shares exceed ₹1,00,000 in a year.

• Investments in tax-saving mutual funds like ELSS qualify for tax deduction up to 1.5 lakh per annum under Section 80C of the Income Tax Act.
• These funds carry one of the shortest lock-in period among all 80C investments.
• You can invest in tax-saving mutual funds via a systematic investment plan (i.e. weekly, monthly, quarterly, semi-annually or annually) or as a lump sum in one go.
• Investing in these funds potentially generates reasonable returns in long term as they are invested in equity-linked instruments.
• Tax-saving mutual funds have the potential to building wealth in the long run. 

Conclusion

Consider investing in tax-saving investments to reap potential reasonable returns and to save taxes. These can also help you achieve your long-term goals.

The information given here is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme