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How to save tax through ELSS Mutual Funds

ELSS or Equity Linked Saving Scheme is a category of mutual fund which offers a convenient way to get tax benefits under Section 80C of the Income Tax Act 1961, while aiming to provide the potential returns of equity markets. Therefore, if you are looking to save taxes then investing in ELSS mutual fund makes sense!

Equity Linked Saving Schemes or ELSS Fund are essentially diversified equity mutual fund schemes, which invest in stocks of diversified sectors and market capitalization. Also known as tax saver fund, it is considered as best option for generating capital appreciation over a long investment period.

Section 80C and how do the deductions work

If you are worried about how to save taxes, please note that when you invest in certain schemes like ELSS mutual fund, Public Provident Fund (PPF), Tax saving bank FDs, NSC and Life insurance premiums etc. you can claim up to Rs. 150,000 in a financial year as deduction from gross total income.

The Table below will explain how this works –

Particulars Without the tax saving With tax saving
investments u/s 80C investments u/s 80C
Gross total income Rs 700,000 Rs 700,000
Exemption u/s 80C Nil Rs 150,000
Total income Rs 700,000 Rs 550,000
Tax on total income Rs 65,000 Rs 35,000
Tax saved amount Nil Rs 30,000

(Illustration of Tax exemption for an individual of <60 years age salary income for the assessment year 2020-21

From the above chart you can see that, if you invest Rs 150,000 in any investment option under Section 80C including ELSS, you can save substantial amount of taxes.

Why invest in tax saving mutual funds?

  • High returns – By investing in ELSS mutual fund schemes, you get opportunity to grow your money by investing in equities. In the last 5 years, ELSS fund category average annual returns have been over 14.42% (source: Advisorkhoj as on 3/9/21)
  • Tax efficient – Long term capital gains (LTCG) realized from ELSS mutual fund is taxed at only 10% if it is over Rs 1 Lakh in a financial year. Capital gains tax is nil if the gain is less than Rs 1 Lakh in a FY.  There is nil short term capital gains as the units of ELSS mutual fund investment is locked-in for 3 years from date of investment.
  • Least lock-in period – ELSS mutual funds in India has only 3 years lock-in compared to 15 years of PPF and 5 years for NSC, tax saver FDs etc.
  • Systematic investing – If you do not have lump sum amount to save taxes, you may start investing in tax saving mutual funds through SIP. SIPs help you invest a fixed amount on a fixed date monthly in whichever ELSS mutual fund you choose. SIP in mutual funds forms the habit of savings and brings a sense of discipline in you without having to worry about investing a big amount at the end of the financial year for saving taxes.

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