Looking for a tax-efficient way to save on taxes? Investing in Tax Saver ELSS Mutual Funds could be one of the smartest decisions you make.
They say wealth sets you free!
For wealth creation, it’s important to save the taxes and make your money work for you by investing it into appropriate instruments which the rich people do smartly. That’s why investing in tax saver ELSS mutual funds could be a smart decision you make!
Discover everything you need to know about these mutual funds and how you can benefit from them.
Table of Contents
- What are Tax Saver ELSS Mutual Funds?
- How Do They Work?
- What are The Benefits of Investing in Tax Saver ELSS Funds?
- How Much Tax Can Be Saved by Investing in ELSS
- Risk of Investing in ELSS Tax Saver Funds
- Is it Advisable to Invest in ELSS Funds?
- How Can I Get Advice on Choosing An ELSS Fund?
- Final Thoughts
What are Tax Saver ELSS Mutual Funds?
Tax Saver ELSS Mutual Funds are diversified equity mutual funds and the investment made to these funds is eligible for deduction from your taxable income up to Rs. 1.5 lakh under Section 80C of the Indian Tax Act.
ELSS stands for equity linked savings scheme, a mutual fund scheme to offer dual advantage of tax saving along with opportunity for wealth creation through higher returns on investment.
They offer potential for higher returns than other types of investments such as bank deposits, FDs (fixed deposits), PPF (public provident fund) or NSCs (national savings certificates).
So make sure you consider them as part of your investment strategy if you want to save taxes while earning a good return!
The tax saver ELSS funds come with a 3-year lock-in period which is much short than other tax saving instruments.
PPF has a lock-in period of 15 years while 7 years for NSCs. Short lock-in period of ELSS gives much flexibility to your savings in medium term.
Hence, tax saving mutual funds should be your go-to option if you’re looking for tax savings along with decent returns from your savings.
How Do They Work?
Tax Saver ELSS Mutual Funds work by enabling investors to invest a lump-sum amount or ‘invest’ over time, through an option known as Systematic Investment Plan (SIP) in mutual fund scheme.
A systematic investment plan allows investors to invest a fixed amount into a mutual fund scheme at regular intervals of either daily, weekly, fortnightly, monthly or quarterly as specified by you.
If you’re looking to save taxes while earning a good return, they are definitely your best option!
What are The Benefits of Investing in Tax Saver ELSS Funds?
The tax saver ELSS funds offer multiple benefits and provide investors with a secure option for their investments.
- Unlike other tax saver options, these funds are equity linked investments and offer potential for higher returns in the long run.
- Investors also benefit from tax rebates due to their eligibility for section 80C deductions on investments up to Rs 1.5 lakhs in a financial year.
- Additionally, with ELSS tax saver mutual fund lock-in period of only 3 years being shortest, provides more flexibility than other tax saving instruments.
However, it is important to note that the returns earned on the tax saving mutual funds are taxable when redeemed as per provision of long-term capital gains. That means, 1 lakh of gain is tax free while the gains above 1 lakh are taxable at the rate of 10%.
How Much Tax Can Be Saved by Investing in ELSS
Section 80C of Indian Tax Act allows deduction up to ₹1,50,000 from your taxable income. By investing in ELSS, you can save tax up to ₹46800 depending upon your taxable income (less than ₹50 lac).
Let’s understand how ELSS saves tax with an illustration;
I have used the income tax calculator from the official website of income tax department, Govt. of India for the illustration purpose.
Note: Tax amount includes Health & Education cess @4%.
| Taxable Income (₹) | Tax Rate | Tax Without ELSS | Tax With ELSS | Tax Savings |
|---|---|---|---|---|
| 5,00,00 | 5% above 2,50,000 | 12,500 | 5,000 | 7500 |
| 10,00,000 | 20% above 5,00,000 | 1,17,000 | 85,800 | 31,200 |
| More Than 10,00,000 | 30% above 10,00,000 | >31,200 | ||
Risk of Investing in ELSS Tax Saver Funds
The ELSS funds are equity-based funds. The returns by equites are never predictable.
Thus, the returns offered by the tax saver mutual funds cannot be predicted. The probability of getting returns on investment below expectations or even negative returns is always there.
However, giving medium to long-term time horizon to the investment and choosing a right ELSS tax saver fund scheme reduces the risk and offers a very good opportunity for building wealth.
Is it Advisable to Invest in ELSS Funds?
Yes, it is advisable to invest in ELSS funds if you would like to save on taxes and willing to take risk on your investment.
ELSS funds offer potential for higher returns than other tax saver options, along with the additional benefit of market linked investment and a short lock-in period.
However, you should remember that these investments carry inherent risks due to their nature of equity fund investments and hence investors should arm themselves with knowledge and understand their risk appetite before investing.
How Can I Get Advice on Choosing An ELSS Fund?
When you are looking to invest in ELSS funds, it is always advisable to take professional advice on which fund would be best suited for your needs and your risk appetite.
An experienced financial planner is the best person to help you decide on an ELSS fund that meets your requirements. They are familiar with the market conditions and can also elaborate on the various aspects of investing in tax saver mutual funds.
However, some investors may find it unaffordable to hire a certified financial planner for the duration of the investment due to their higher fee.
Registered mutual fund distributors can also assist you in choosing and investing in an appropriate tax saver scheme. The fee of a mutual fund distributor is in the form of a commission which is paid to them by the asset management companies. The investor does not bear the cost directly.
The benefit of having a mutual fund distributor by your side is that they keep you guiding regarding your investment whenever needed.
Final Thoughts
Investing in Tax Saver ELSS Mutual Funds could be one of the smartest investment decision you make. It helps you save on taxes along with an opportunity to create wealth for your financial goals.
Though risk of investment is there as with any other investment, you can make it to work to your advantage by taking an informed decision regarding choosing an appropriate fund and giving the invesmtment few years to play out!
Are you investing already in tax saver ELSS mutual funds or planning to start investing? Let us know!
