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Tax saving exercises form an integral part of personal financial planning. As we approach the end of yet another financial year, you will have to submit proof of investments to qualify for deductions in taxable income at workplace.

ELSS (Equity Linked Savings Scheme) or tax saver mutual funds, is one of the most popular investments under section 80C of the Indian Income Tax Act, 1961.You can save tax up to the limit of Rs. 1.5 lakhs in investments per year, under Sec. 80C. As these schemes also invest in equities, this provides you the opportunity to gain higher returns over the long-term.

Benefits of Tax Saver Mutual Funds

Consider the following benefits of investing in tax saver mutual funds;

  • You can save about Rs.46, 800 of tax with ELSS tax saving mutual fund.
  • Along with tax benefits, you also get tax free-dividends. If you invest in ELSS funds, the dividend you receive is completely tax-free. The best thing about this benefit is that it has no maximum limit on the dividend amount for exemption.
  • Has the lowest lock-in period of 3 years. This is in sharp contrast to other tax-saving investments like fixed deposits or National Savings Certificate (NSC), where lock-in period is 5-years or more.
  • Even if the lock-in period has elapsed, you can continue to hold on to these funds, as long as they are doing well. Invest in the equity shares of companies across different assets of market capitalization i.e. large-caps, mid-caps, and small-caps. This reduces the risk raised by market volatility.
  • When the equity funds are diversified, investors enjoy the dual benefits of capital gains and tax deductions in the long-run.

How to Save Tax on Mutual Fund Returns?

1) Invest in equity mutual funds if you have a good risk-appetite

You get tax-free dividends from ELSS (Equity Linked Mutual Funds) or tax saver mutual funds. If you sell your equity mutual funds after completing one year, the returns get qualified for long-term capital gains tax. The tax on long-term capital gains is exempted on under section 80C. However, the short-term (less than one year) capital gains on equity linked mutual funds qualify for 15% tax rate.

2) Invest in debt funds if you have a low risk appetite

Investing in debt-mutual funds, when you have low-risk appetite gives you the benefit of indexation. In indexation, the purchase price of debt-funds is adjusted in relation to inflationary levels, so that your tax liability can be lowered.

3) Invest in dividend options to have regular income

To get a regular income, you should opt for dividend option in mutual fund, especially if you are a senior citizen. However, the income on this is not fixed; sometimes returns may get even lower than bank fixed deposits. Investing in ELSS scheme is easy through online portals, where KYC requirements need to be fulfilled before investing. It is done just like any other mutual fund schemes.

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