ITR Filing FY 2023-24 (AY 2024-25) live

File your ITR Hassle-Free and Maximise your Refunds

File Today
  • TrustedTrusted by 1 Million+ Users
  • User Rating4.8 Star User Rating
  • SecureAuthorized by Tax Department
ITR Filing

ELSS Funds- Invest in Tax Saving Mutual Funds

Updated on: 23 May, 2024 05:19 PM

Mutual fund investment is a very trending topic these days. Mutual fund investment offers investors to make investments in various financial instruments by utilizing the skill and knowledge of trained investment managers.
Mutual funds offer better returns in comparison to other traditional modes of investment. Mutual funds collect money from several investors and invest the amount in a balanced portfolio comprising debt securities and equity instruments. Multiple mutual fund choices allow the investors to select any fund based on their appetite and objective.
Here the question arises if investors get any tax benefits for investing in mutual funds. For example, what happens to the taxes that investors pay on their income? So, the answer is Yes; if the investment is made in a tax saving mutual fund, the tax benefits can be enjoyed under Section 80C of the Income Tax Act, 1961.

What are Tax Saving Mutual Funds?

Tax saving mutual funds offers dual advantage, better returns and tax benefits. Investing in tax saving mutual funds makes you eligible for tax benefits under Section 80C of the Indian Income Tax Act. Most tax saving mutual funds are ELSS schemes and invest in the growth-oriented equity market.

What is Equity Linked Savings Scheme (ELSS) Mutual Fund?

Equity Linked Savings Schemes are equity funds that allow you to invest in your long-term goals and save taxes. ELSS mutual fund is also known as tax-saver funds. ELSS enables an individual or HUF a tax exemption of up to Rs. 1.5 lacs under Section 80C from your annual taxable income. Thus, if any investor is looking forward to investing Rs. 50,000 in an ELSS, this amount will be subtracted from his Gross total income, thus helping in tax saving.
The lock-in time of the ELSS scheme is three years, and the income you earn at the end of the three-year tenure is known as Long Term Capital Gain (LTCG). Long Term Capital Gain (LTCG) is taxed at 10% if the income exceeds Rs. 1 lakh.
Furthermore, investors can invest in this tax saving mutual fund via two modes: - Systematic Investment Plan and lump-sum. SIP allows investors to invest in the ELSS mutual fund scheme by paying a fixed amount at regular intervals (monthly, quarterly, annually, etc.). Conversely, the lump-sum method allows investors to invest the available funds in an ELSS mutual fund scheme in one go.

Types of Equity-linked Savings Scheme (ELSS)

There are mainly the following types of Equity-linked Savings Schemes:-
  • Dividend scheme: This scheme allows the investors to get an extra income in the form of dividends from time to time as per the availability of the distributable surplus. The dividend scheme doesn’t have tax and is not subject to lock-in periods. The income in this scheme can be withdrawn and is eligible for tax benefits.
  • Growth scheme: This kind of scheme generates long-term capital for the investors and can be redeemed at the end of the maturity period.
  • Dividend Reinvestments option: This is an option under which an investor reinvests the dividends received to add to the NAV. This works well, particularly when the market is witnessing an upswing and is likely to continue the same way.

How do Tax Saving Mutual Funds work?

The investment capital is added to the pool once an investor invests money. The collection of the portfolio is then invested in the equity market. The fund is balanced in a way that even if one of the investments incurs losses, the other investment is managed so that the overall portfolio is not affected. For example, the breakup of an investment in a particular fund may look like this:

  • Automotive industry - 6.56%
  • Banks - 17.56%
  • Consumer durables - 5.34%
  • Consumer non-durables - 5.66%
  • Power - 5.92%
  • Software - 8.93%
  • Pharmaceuticals - 9.99%

The above-provided table shows how a mutual fund allots assets in market securities.
Furthermore, the lock-in period for the ELSS mutual fund is 3 years, which means the withdrawal can't be made until the maturity period's end. Therefore, at the time of redemption of the units of the fund, investors can unlock the current Net Asset Value price. The unit's net Asset Value (NAV) is the amount that any investor receives on each unit redemption.
Moreover, at the time of redemption, you need to know the number of units available in the scheme and submit a claim form to the mutual fund provider. As soon as the amount is processed, the credit is done into the account.

What are the features of ELSS tax saving mutual funds?

  • ELSS mutual fund is the shortest tax saving mutual fund. The tenure of this fund is three years from the date of unit allotment.
  • Investment in ELSS tax saving mutual fund offers better return potential than traditional ones.
  • One can start investing in ELSS with Rs. 500 only. There is no upper capping.
  • ELSS are mutual funds, so there are risks too, which can be high or low depending on where the funds are invested.
  • The providers charge specific fees on the purchase/sale/redemption/transfer of the fund units by the investors.

What are the tax benefits provided by ELSS tax saving mutual funds?

  • Investments in tax saving mutual funds are eligible for tax benefits of up to Rs. 1.5 lakh.
  • The long-term capital gains under the ELSS mutual fund scheme is tax free and long-term capital gains above Rs. 1 lakh are taxed at 10%.
  • ELSS plan allows you to invest monthly via SIPs (Systematic Investment Plan), thereby mitigating the need to invest in one go.
  • ELSS tax saving mutual fund offers a diversified portfolio that reduces risk and ensures you won’t miss out on any opportunity.
  • The dividends earned can be withdrawn even during the lock-in period though the principal amount can’t be withdrawn.
  • Investments can be made annually under this scheme because of its open-ended nature.

What factors should be undertaken before investing in an ELSS tax saving mutual fund?

  • Returns: ELSS tax saving mutual funds returns entirely depend on the performance of securities. However, if you have invested longer than 5 years, the chances of getting high returns are there.
  • Investment horizon: Investment horizon means investment for over five years in ELSS funds. To mitigate market volatility, it is important to invest for a longer term in the equity exposure of ELSS funds.
  • Lock-in period: ELSS tax saving mutual funds come with a tenure of 3 years. Therefore, investments are locked-in for three years. Also, you cannot redeem your holdings until the completion of this period.

How to Invest in an ELSS tax saving mutual fund?

  • First, you need to select the mutual fund company in which you will invest. This should be done considering your investing goals and risk appetite.
    1. Visit the mutual fund company (AMC) website
    2. Visit the RTA (registrar and transfer agent) website
    3. Visit online mutual fund platforms
  • At any of the above websites, you have to register first. To register, you are asked to enter your mobile number, email ID, and PAN number. Once you enter the details, the website automatically verifies whether you are a mutual fund KYC compliant or not.
  • If you are a mutual fund KYC compliant, you can select the scheme in which you want to invest (regular or direct) and the option (dividend payout or growth) you want to opt.
  • The next step is to decide whether you want to invest in a lump sum or SIP.
  • Next, you can pay online from your bank account using the net-banking option.

( Note: Do check if the platform you chose offers regular plans or direct plans. It is advisable to choose a platform that offers you to buy the plan in which you want to invest.)

Top 10 Tax Saving Mutual Funds

Funds 1-Year Returns (%) 3-Year Returns 5-Year Returns
IDFC Tax Advantage (ELSS) Fund Growth 23.1 11.7 22.3
Tata India Tax Savings Fund Growth 14.6 12.3
L&T Tax Advantage Fund Growth 16.2 13 20.3
Aditya Birla Sun Life Tax Relief 96 Fund Growth 19.3 12.1 23.5
Aditya Birla Sun Life Tax Plan Growth 18.9 11.6 22.6
DSP BlackRock Tax Saver Fund Growth 9 11.4 21
Axis Long Term Equity Fund Growth 18.1 9.3 24
Kotak Tax Saver Fund Growth -4.79 10.25 17.66
Invesco India Tax Plan Fund Growth 0.6 11.1 19.0
HDFC TaxSaver Fund -11.1 8.5 15.0

Frequently Asked Questions

Q- Is investing in mutual funds a wise decision?

Investing in ELSS mutual funds make you eligible for tax deduction up to 1.5 lakh per annum under Section 80C of the income Tax Act, 1961. Additionally, it has the shortest lock-in period among all others.

Q- When should the SIP be paid?

When you apply for SIP with a particular mutual fund, the date when the payment must be made is informed to you. At your convenience, the date can be chosen.

Q- What is the minimum amount to invest in ELSS?

This minimum amount depends on the mutual fund provider. But, generally, it is around Rs.5000.

Q- What is the NAV or Net Asset Value of a fund?

NAV is the price of each unit of the fund on a particular day. When any investor asks for a withdrawal with a fund house, the number of units available for withdrawal is multiplied by the applicable NAV price of the units, and the calculated amount is credited to the investor's account.

Q- Does a high NAV mean the fund is good?

Not necessarily; to determine which fund is good, see the history of the fund's returns. You can also check the rating with credit rating companies.

Q- What mode should be chosen to pay the investment under the ELSS tax saving mutual fund?

It depends on your convenience if you want to pay in installments or go for a lump sum investment. The benefit of investing in ELSS mutual funds via monthly installments is that the risk of loss on the entire investment amount due to market fluctuations can be avoided.

Q- What maximum amount can be invested under a tax saving mutual fund?

There is no cap on the maximum amount to invest.

Q- What is the minimum withdrawal amount?

The minimum withdrawal amount is Rs. 1000. This may vary from company to company.

Q- What is the maximum amount that can be withdrawn?

The NAV and number of units available under the scheme decide the maximum amount that can be withdrawn.

Q- Can an NRI invest in ELSS?

Yes, NRIs can invest in tax saving mutual funds like ELSS.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.