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Mutual fundsAccording to the Association of Mutual Funds in India(AMFI), mutual fund is a pool of money managed by a trust that collects money from a number of investors sharing similar investment objectives and invests the same in equities, bonds, money market instruments, and/or other securities.

Mutual funds are the most conducive option for an amateur investor, who neither has any idea about the stock markets nor has the time to research the markets and make investment decisions. These funds are managed by professional fund managers who are experts in this field and do all the ground work for the investor and invest in different portfolios, in line with the scheme’s stated objective. Mutual funds are recommended for long term investment.

Income tax is a tax that is levied by the central government on the income earned by the individual and businesses during a financial year. The revenue generated from tax is used in the infrastructure development, health care facilities, subsidy to farmers and agricultural sector, education and other welfare schemes of the government.

The calculation of tax to be paid by an individual or business is based on the income slab rate applicable during the financial year. With proper tax planning you can save on your taxes and increase your income. The income tax act provides exemptions and deduction for various investments and savings made by a taxpayer during the financial year. You can save tax through

Why are ELSS Mutual Funds the Best Tax-Saving Option?

ELSS is the only kind of mutual fund which falls under tax saving options under the provisions of Section 80C of the Income Tax Act, 1961. ELSS has dual benefits such as tax deduction and wealth accumulation. The lock in period of 3 years is the shortest among all tax saving investment options.

Investments of up to ₹1,50,000 are eligible for annual tax deductions. Although you can invest more but any excess amount will not be qualified for tax deductions. If investor falls in high income tax bracket then he can save save up to Rs 46,800 a year in taxes by investing in ELSS mutual funds.

ELSS fund has a mandatory lock-in period of 3 years. Therefore, on redeeming the units after lock in period, you receive long-term capital gains or LTCG. These gains are not taxable up to Rs. 1 lakh in one financial year. Any LTCG above this limit is taxed at 10% of the gains exceeding Rs. 1 lakh without indexation.

ELSS has the potential to offer highest return amongst all 80C options. ELSS option is the best for investor who can tolerate risk as mutual fund always carries risk along with it.

What is ELSS (Equity Linked Savings Scheme)?

As the name suggests, Equity linked saving schemes (ELSS) invests in equity market. As the equity market is volatile, ELSS carries risk along with it. But it gives highest return as compared to any other tax saving option. ELSS is catching eye of modern generation due to its high return.

ELSS funds can be categorized into:

  1. Growth option: ELSS growth option is good option for wealth creation. At maturity of ELSS scheme, the investor receives the full redemption amount as a lump sum.
  2. Dividend optionELSS dividend option gives investors dividend income through the course of the scheme. Investor has two options: he can choose to receive payouts whenever the fund declares dividends, or he can choose to reinvest them.

How to invest in ELSS? SIP or Lumpsum?

You have two options to invest in ELSS like mutual fund: Invest lumpsum amount or Systematic Investment Plan (SIP) If you invest lumpsum amount in ELSS when market is high then it becomes risky. ELSS is long term investment then investing through SIP across different market cycle can average out buying cost of ELSS fund units.

Investing lumpsum is advisable when market is not high. Benefit of averaging of price is available in SIP option only. This option is not available in lumpsum investment option. The minimum investment amount in an ELSS fund is ₹500.

Also Read: A Beginners Guide to Systematic Investment Plan

What are the factors to consider before investing in ELSS?

  • Investment horizon: Mutual fund is a long term investment so investment horizon for ELSS fund has to be longer than five years. As ELSS majorly invests in equity and due to market volatility, investor has to wait for better return.
  • Returns: ELSS fund does not provide guaranteed returns as it entirely depends on the performance of the securities in which it has invested. However, having an investment horizon of longer than 5 years can provide higher returns than any other tax-saving investment option.
  • Lock-in period: ELSS mutual funds come with a lock-in period of 3 years. You cant redeem your investment before 3 years.
  • Tax exemption: ELSS investments are eligible for up to ₹1,50,000 tax deductions a year under Section 80C of Income Tax Act. But Section 80C also contains many other options like Public Provident Fund (PPF), National Saving Certificate, National Pension System (NPS), Unit Linked Insurance Plan (ULIP), many more. And if you have any other claims in section 80C, then entire ELSS amount may not be eligible for deductions.
Investment options under Section 80C of Income Tax Act
Employee Provident Fund (EPF)
Public Provident Fund (PPF)
Equity Linked Saving Schemes (ELSS)
National Pension Scheme (NPS)
Life Insurance Premium
National Saving Certificate (NSC)
Tax Saving FD Senior Citizen Saving Scheme
Sukanya Samriddhi Yojna
Unit Linked Insurance Plan (ULIP)
Principal Payment of Home Loan

Comparison of ELSS with other tax saving investment options:

There are various tax saving schemes available which creates wealth along with tax saving. But, as you can see from following table, the returns offered are limited and so ELSS becomes eye catcher as it gives attractive return. Return of ELSS is attractive when the market is bullish and investment was made when market was low.

InvestmentReturns (interest)Lock in period
5- year Bank Deposit5% to 7%5 years
Public Provident Fund (PPF)7% to 8%15 years
National Saving Certificate7% to 8%5 years
National Pension System (NPS)12% to 14%Till Retirement
ELSS Funds15% to 18%3 years


We read how to save tax investing in ELSS mutual fund and its comparison with other tax saving investment options. Choice of investment depends upon one’s financial goals, risk appetite. But, investing in ELSS mutual fund can grow your money and save your tax too. B4investing can help you plan your investment in proper way.

Post Author: ashwini

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