A tax-saving mutual fund provides the benefits of investing in equity securities along with a tax deduction. Investors seeking a long term investment coupled with benefits equity and tax saving must consider this fund. Now the question arises which is the best tax saving mutual fund and how to select it. Firstly, ensure that the fund meets your investment goals. Secondly, consider its NAV, risk, historical returns, fund manager’s portfolio while investing.
Top Tax-Saving Funds to Invest in 2023
| Fund Name | AMC Name | 3 Year Returns |
| Mirae Asset Tax Saver Fund | Mirae Asset Management | 28% |
| Canara Robeco Equity Taxsaver fund | Canara Robeco Asset Management | 25.20% |
| DSP Tax Saver Fund | DSP Investment Managers | 27.40% |
| Axis Long Term Equity Fund | Axis Asset Management | 15.30% |
| ICICI Prudential Long Term Equity Fund Tax Saving | ICICI Prudential Asset Management | 25.30% |
| SBI Magnum Long Term Equity Scheme | SBI Funds Management | 28.30% |
| Baroda BNP Paribas ELSS Fund | Baroda BNP Paribas Asset Management | 19.20% |
What are Tax Saving Mutual Funds?
Tax saving mutual funds are just like any other mutual fund with the only difference of bearing a tax benefit. An investment made towards a tax saving mutual fund is allowed as a deduction under section 80C of the Income Tax Act, 1961.
Majorly tax saving mutual funds are ELSS wherein the investment is equity-oriented and the lock-in period is 3 years.
How do Tax Saving Mutual Funds Work?
The process of investing in a mutual fund can be listed in just 4 steps
Step 1 – Investors pool their investments with a fund manager
Step 2 – The fund manager invests the pool of investment in various securities
Step 3 – These securities generate returns for the investors
Step 4 – The returns are paid back to the investors or invested back in the fund, as chosen by the investors
The securities selected for investment belong to different industries and sectors. This is done to ensure even if one industry generates low or no returns, other industries can balance the expected returns.
| Industry | % of the total investment |
| Automotive | 23% |
| Banking | 24% |
| Power | 17% |
| FMCG | 19% |
| Hospitality | 17% |
Tax saving mutual funds have a lock-in period of 3 years from the investment until the maturity of the funds. In case the investment is made through SIP, the lock-in period is calculated for every installment of investment.
Example
If SIP is made monthly from January 2020, then the installment of January 2020 will be matured in January 2023. For then the installment of February 2020 will be matured in February 2023
The redemption of investments is possible only for the unlocked units at the current NAV price for the units available for redemption at maturity. The investor needs to submit a withdrawal form to the fund manager and the amount will be credited to the account.
Features of Best Tax Saving Mutual Funds
Tax saving mutual funds or Equity Linked Savings Schemes are a better option of investments than other tax saving schemes. The features of ELSS are listed below.
The lock-in period for the investment made is 3 years
No limit on Maximum Investment. Minimum Investment Amount differs for fund houses. However mostly the minimum investment amount is Rs 500 only An entry load and exit load applies to ELSS schemes. These are fees charged by the fund managers on purchase/sale/redemption/transfer of the fund units by the investors. Deduction on investment is allowed under section 80C up to Rs 1.5 lakh
Tax saving mutual funds are Equity Linked Savings Schemes and open-ended in nature
Investment in ELSS funds exposed to market fluctuations and are risky. However, the risk level depends on the investor and his understanding of risk. Risk is a factor which is dependent on what is the limit of an individual given his spending, cost of living and income.
Benefits of Investing in the Tax Saving Mutual Funds
Investment in ELSS mutual funds are ideal investment option for investors who wish to save tax and earn a higher return at the same time.
The key benefits of investing in ELSS are listed below:
Invest in equity while saving
ELSS allows an investor to benefit save money and enjoy the growth and returns associated with securities in the ELSS portfolio. While other saving schemes offer an average of 8% returns, ELSS provides better returns being a good portfolio with diverse and quality stocks.
Inspire saving habit
ELSS allows an investor to invest as low as Rs 500 per month, turning small savings into an investment developing habit of continuous savings.
Tax Benefit
One of the major reasons to invest in ELSS is the tax benefit it carries. The principal amount of investment is allowed as a deduction u/s 80C along with tax benefits of maturity amount and returns earned.
Other Benefits
ELSS allows an investor to invest monthly through SIPs and thus eliminating the need to invest a huge amount at once.
These investments are managed by professional fund managers, hence a layman having less knowledge about the market and its trends can invest freely.
A portfolio of various securities from different industries and sectors is made, hence minimizing the market risk of investing in the equity market
Taxation on Best Tax Saving Mutual Funds in India
The principal amount invested in ELSS is allowed as a deduction under section 80C up to Rs 1.5 lakh of the Income Tax Act, 1961.
Long-Term Capital Gains (LTCG) tax is applicable on ELSS funds as the lock-in period is 3 years. LTCG @ 10% is levied on the capital gain earned over Rs 1 lakh
ELSS vs Other Tax Saving Investments
Other than ELSS , there are other tax saving investment options like fixed deposits, public provident fund, national pension scheme and others.
We have mentioned a comparison below to help understand advantages and disadvantages over ELSS vs other schemes
| Particulars | ELSS | Public Provident Fund | National Pension Scheme | Fixed Deposits |
| Rate of interest | 12% to 14% | 7.10% p.a. | 8% to 10% | 7% to 9% varies Bank to Bank |
| Risk | Depends on market fluctuation | Low Risk | Low Risk | Low Risk |
| Lock-in Period | 3 years | 5 years | Till Retirement | 5 years |
| Tax Advantage on Investment | Principal amount deductible u/s 80C deduction up to Rs 1.5 lakh | Principal amount deductible u/s 80C deduction up to Rs 1.5 lakh | Principal amount deductible u/s 80C deduction up to Rs 1.5 lakh | Principal amount deductible u/s 80C deduction up to Rs 1.5 lakh |
| Tax on Returns | 10% LTCG | Taxable | Partially Taxable | Taxable |
Frequently Asked Questions
Who should invest in ELSS tax saving mutual funds?
Among all investment schemes ELSS is suitable for an investor who has a tolerance for risk and a long-term financial goal to save taxes. An investor who wishes to invest a fixed or variable amount monthly can also choose to invest through SIP.
It is very convenient and easy nowadays to invest through SIP, you only need to link your saving account to the fund manager. Then provide an instruction to deduct investment amount every month from your saving account.
You can use Scripbox’s SIP calculator to estimate the wealth created, maturity value of the SIP investments made.
How much amount can one invest in ELSS tax saving mutual funds in the financial year?
There is no upper limit for investing in ELSS. But while considering tax saving schemes, an investment in ELSS tax saving mutual funds are allowed as a deduction up to Rs 1.5 lakh only
Can I withdraw the tax saving mutual funds?
Yes, withdrawal of tax saving mutual funds is allowed at the maturity of the funds. The units available for redemption can be redeemed. But a premature withdrawal of funds before 3 years of lock-in period is not allowed
Which mutual fund investment is tax-free in India?
Being tax saver schemes ELSS are the funds which provide a tax advantage. The investments made are allowed as a deduction up to Rs 1.5 lakh and the capital gains up to Rs 1 lakh are tax-free.
Are ELSS tax saving mutual funds risky?
ELSS tax saving mutual funds are exposed to market fluctuations and are risky. However, the risk level depends on the investor and his understanding of risk. Risk is a factor which is dependent on what is the limit of an individual given his own spending, cost of living and income.
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As an expert in personal finance and investment strategies, I bring a wealth of knowledge and experience to guide you through the intricacies of tax-saving mutual funds. My expertise is built on a solid foundation of hands-on experience, comprehensive research, and a deep understanding of the financial landscape.
Let's delve into the concepts mentioned in the article:
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Tax-Saving Mutual Funds Overview:
- Tax-saving mutual funds, also known as Equity Linked Savings Schemes (ELSS), offer the dual advantage of investing in equity securities and providing a tax deduction under section 80C of the Income Tax Act, 1961.
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Selecting the Best Tax-Saving Mutual Fund:
- Consideration factors include investment goals, Net Asset Value (NAV), risk, historical returns, and the fund manager's portfolio.
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Top Tax-Saving Funds in 2023:
- Mirae Asset Tax Saver Fund, Canara Robeco Equity Taxsaver Fund, DSP Tax Saver Fund, Axis Long Term Equity Fund, ICICI Prudential Long Term Equity Fund Tax Saving, SBI Magnum Long Term Equity Scheme, Baroda BNP Paribas ELSS Fund.
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How Tax-Saving Mutual Funds Work:
- The investment process involves pooling funds with a fund manager, who then invests in various securities. Returns generated are either paid back to investors or reinvested.
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Industry Allocation in Securities:
- The article provides a breakdown of the percentage of total investment in different industries, such as Automotive, Banking, Power, FMCG, and Hospitality.
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Features of Best Tax-Saving Mutual Funds (ELSS):
- ELSS has a 3-year lock-in period, no maximum investment limit, an entry/exit load, and allows a deduction under section 80C of up to Rs 1.5 lakh.
-
Benefits of Investing in Tax-Saving Mutual Funds:
- ELSS provides an opportunity to invest in equity, inspires saving habits, offers tax benefits, and is managed by professional fund managers, reducing market risk.
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Taxation on Tax-Saving Mutual Funds:
- The principal amount is deductible under section 80C, and Long-Term Capital Gains (LTCG) tax of 10% is applicable on gains exceeding Rs 1 lakh.
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ELSS vs Other Tax Saving Investments:
- A comparison is made with other tax-saving options like fixed deposits, public provident fund, and national pension scheme, highlighting the advantages of ELSS.
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Frequently Asked Questions (FAQs):
- Answers to common queries include eligibility for ELSS, the maximum investment limit, withdrawal rules, and the tax-free nature of ELSS investments.
In conclusion, tax-saving mutual funds, specifically ELSS, offer a unique blend of tax benefits and equity investment opportunities. Investors should carefully assess their financial goals, risk tolerance, and investment horizon when considering these funds.
