What are Tax Saving Mutual Funds
Tax saving mutual funds are just like any other mutual funds with the added bonus that investments made in them are eligible for tax benefits under section 80C. Most of the tax saving mutual funds are ELSS schemes and make investments in equity markets.
How do Tax Saving Mutual Funds work
When an investor invests their money in mutual funds, the funds are added to the pool. The funds are then invested in the equity markets in such a way that even if one investment incurs losses, the other investment manage to mitigate the loss. For example, the breakup of an invest in a particular fund may look like:
- Automotive industry 6.56%
- Banks 17.56%
- Consumer durable 5.34%
- Consumer non-durable 5.66%
- Power 5.92%
- Software 8.93%
- Pharmaceuticals 9.99%
Types of ELSS
There are two types of schemes under these mutual funds. One is the dividend scheme and the other is the growth scheme. The difference between the two is that in the dividend scheme, if the fund announces dividend then investors get an extra income based on those dividends. These dividends are not subject to tax or lock-in periods and can be withdrawn or reinvested in the fund and will become eligible for tax benefits. There are no such provisions under the growth schemes.
Features of Tax Saving Mutual Funds
- If you can’t afford to put in large sums to invest then the investing in ELSS can begin with Rs. 500 and has no upper limit, unlike PPF and NSC.
- While there is no upper limit, only investments worth Rs. 100,000 will be eligible for tax benefits.
- Investments made in tax saving mutual funds come with lock in periods of 3 years.
- As a result of being mutual funds these investments come with an inherent risk factor which can either low, medium or high based on where the funds are invested.
- Typically, tax saving mutual funds are ELSS’ (Equity Linked Savings Schemes) and open ended.
- These mutual funds also offer nomination facilities.
- Many of the ELSS schemes will feature entry and exit loads. These are the fees paid to the mutual fund providers.
Benefits of Tax Saving Mutual Funds
There are lots of benefits to be gain from investing in a tax saving mutual fund. These are some of them:
- The first and most obvious benefit is that the investments are eligible for tax benefits up to Rs. 1.5 lakh.
- The second benefit is that long term capital gains are not taxed.
- Investments in these funds can be made as a means to plan for future expenses like buying a car or paying the down payment for a house.
- These plans allow investors to invest on a monthly basis via an SIP (Systematic Investment Plan) thereby negating the need to invest in one go.
- The funds are not invested in one place; the portfolios are kept diverse so as to minimize the risk of massive losses.
- If you choose not to withdraw the investment, it will continue to grow and turn into savings for a rainy day.
- While you may not be able to withdraw the principal, you can withdraw the dividends earned, even during the lock-in period.
- While other investments offer lock-in periods of 6 to 15 years, these mutual funds tend to offers only 3 years of a lock in period.
- Since these schemes are open ended, investments in them can be made all year round.
- The particular fund that an investor invests in is run by a qualified funds manager thereby negating the need for investors to have knowledge of the markets.
Tax saving mutual funds ELSS Vs PPF, NSC and FD
|Mutual Funds||Public Provident Fund||National Savings Certificates||Fixed Deposits|
|Maximum investment||Unlimited||Rs. 1.5 lakhs per year||Unlimited||Determined by bank|
|ROI||Determined by the market situation||8.70% per annum (approximate)||8.50% per annum (approximate)||Up to 9% per annum|
|Income tax benefit||Yes||Yes||Yes||Yes|
|Tax on returns||None for long term capital gains||None||Yes||Yes|
|Lock in period||3 years||15 years||6 years||None|
|Premature withdrawal||Not allowed||Partial withdrawal after 6 years||Not allowed||Allowed with penalty|
Top Tax Saving Mutual Funds in India
There are a lot of mutual funds that customers can choose from but some of the best tax savings mutual funds in the country right now are:
- IDBI Equity Advantage Direct-G
- IDBI Equity Advantage Direct-G
- Birla SL Tax Plan Direct-G
- Axis Long Term Equity Direct-G
- Birla SL Tax Relief 96 Direct-G
- Franklin India Taxshield Direct-G
- Birla SL Tax Relief 96-G
- Kotak Tax Saver Direct-G
- Axis Long Term Equity-G
- Birla SL Tax Plan-G