Key things to know about tax saving mutual funds

Tax saving mutual funds are just like any other mutual funds with an added tax-saving benefit. The investments made in the tax-saving mutual funds are eligible for tax benefits under section 80C of the Income Tax Act.

Taxpayers can avail tax deductions of up to Rs 1,50,000 a year by investing in any of the options covered under Section 80C of the Income Tax Act, 1961. According to analysts, tax-planning should be a part of everyone’s financial plan.

Under mutual funds, equity-linked savings schemes (ELSS) are specifically designed for tax savings.

Equity Linked Savings Scheme (ELSS), a tax-saving mutual fund, is an open-ended equity-linked saving scheme with a statutory lock-in of three years and tax benefit. It can be invested using both Systematic Investment Plan (SIP) and lump sum investment options.

ELSS offers tax deductions under the provisions of Section 80C.

According to Archit Gupta, founder and chief executive officer of Cleartax, investors can save up to Rs 46,800 a year in taxes by investing in ELSS. The returns provided by ELSS is in the range of 10 percent to 15 percent when invested with a long-term horizon.

"By investing in traditional tax-saving options such as Employee’s Provident Fund (EPF), Public Provident Fund (PPF) and bank fixed deposits (FDs), you restrict your returns to much less 9 percent a year. Hence, by investing in ELSS, you get the dual benefit of tax deductions and wealth accumulation," he said.

"As compared to the conventional FDs, ELSS gives higher returns to beat inflation in an efficient manner,” said Omkeshwar Singh, head- RankMF, Samco Securities.

One thing that ELSS investors should note is that returns are not guaranteed. This is because ELSS investments are exposed to market risk.  However, the track record of ELSS says that investors have enjoyed high returns when they invest with a long-term horizon (five years and above), according to analysts.

ELSS investors investing through SIPs should note that each of their SIPs is locked-in for a period of three years.

"This means the amount you invest through a SIP in January 2020 is locked-in until January 2023. You cannot withdraw this amount until you complete three years, there is no option of paying the penalty to withdraw the same. However, the lock-in period of three years is the shortest among all tax saving options," according to Gupta.