Tax Saving Mutual Funds

Tax Saving Mutual Funds
Tax Saving Mutual Funds

Mutual fund investments have become very popular these days. These investment solutions offer investors the chance of making investments in various financial instruments by harnessing the skill and knowledge of trained investment managers. The best benefit of these investment tools is that these offer better returns compared to other traditional modes of investment such as fixed deposits. In order to achieve this objective, mutual funds collect money from multiple investors and invest the amount in a balanced portfolio comprising debt securities and equity instruments. The funds also offer multiple choices of investment including open or close-ended schemes, specialty funds, or combinations of all of these. The investors can choose any fund based on their investment objective and risk appetite. Typically, high-risk investments will provide high returns, medium risk investments will provide medium returns and low-risk investments will provide low returns. However, it is up to the investors to decide the fund that they think offers the best chances of achieving their objectives.

Making a mutual fund investment and enjoying the returns is indeed attractive. But do you know what happens to the taxes that investors pay on their income? Do they get any tax benefits for investing in mutual funds? The fact is, if the mutual fund investment is done in a tax saving mutual fund, the investors get tax benefits under section 80C of the Indian Income Tax Act, 1961.

What are Tax Saving Mutual Funds?

Tax saving mutual funds are just like any other mutual funds with an added tax-saving benefit. The special feature of this type of mutual fund is that the investments made in the tax-saving mutual funds are eligible for tax benefits under section 80C of the Indian Income Tax Act. Most of the tax saving mutual funds are ELSS schemes and make investments in the growth-oriented equity market.

How do Tax Saving Mutual Funds work?

When an investor invests money in a mutual fund, the invested capital is added to the pool. The portfolio corpus of the fund is then invested in the equity market in such a balanced way that even if one investment incurs losses, the other investment manages to mitigate the loss. For example, the breakup of an investment in a particular fund may look like:

  • 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 table shows how a mutual fund typically allots its assets in the market securities. It means 6.56% of the investment will be put in the automotive industry and 17.56% in banks and so on.

ELSS schemes tend to come with a lock-in period of 3 years, which means that the investment cannot be withdrawn for till the end of the maturity period. If the investment is made in systematic monthly installments (SIP) then the lock-in period for each installment is 3 years. For example, if the first investment was made on 1 January 2015 and the second one on 1 February 2015 then on 1 January 2018 the first installments will be unlocked. But the second installment will remain locked till 1 February 2018.

When it comes to redemption of the units of the fund, the investors can redeem only the unlocked units at the current NAV price. The NAV or the Net Asset Value of the units is the amount that an investor gets for each unit upon redemption. However, in order to make withdrawals, you will need to know the number of available units under the scheme and submit a claim form to the mutual fund provider. They will credit the amount to your account as soon as it is processed.

Types of Equity-linked Savings Scheme (ELSS)

There are two types of schemes under the tax saving mutual funds. One is the dividend scheme and the other is the growth scheme. While the dividend schemes allow the investors to get an extra income in the form of dividends declared by the respective fund house from time to time as per the availability of the distributable surplus, the growth schemes generate long-term capital appreciation for the investors which can be redeemed at the end of the maturity period. The dividends are not subject to tax or lock-in periods and can be withdrawn or reinvested in the fund and will become eligible for tax benefits. There are no such provisions for the growth schemes under ELSS.

Features of Tax Saving Mutual Funds

The following are the exclusive features of the equity-linked savings schemes that make them a profitable investment option for the investors:

  • If you can't afford to invest large sums in the fund then you can start investing in ELSS with Rs.500 only. Unlike PPF and NSC, there is no upper limit of investment in ELSS.
  • While there is no upper limit, only investments worth Rs.100,000 will be eligible for tax benefits.
  • Investments made in tax saving mutual funds come with a lock-in period of 3 years.
  • Since ELSS’ are mutual funds in nature, investments made in these schemes are prone to market risks which can be either low, medium or high based on where the funds are invested.
  • Typically, tax saving mutual funds are ELSS' (Equity Linked Savings Schemes) and open-ended in nature.
  • These mutual funds offer nomination facilities to the subscribers.
  • Most of the ELSS schemes come with entry and exit loads. These are the fees that are charged by the providers on purchase/sale/redemption/transfer of the fund units by the investors.

Benefits of Tax Saving Mutual Funds

Tax saving mutual funds come with a number of benefits for the investors. Some of the vital ones are as follows:

  • The investments made in these types of funds are eligible for tax benefits of up to Rs.1.5 lakh.
  • The long-term capital gains under these schemes are not taxed.
  • Investments can be made in these schemes as a means to plan for future expenses like buying a car or paying the down payment for a house.
  • These plans allow investors to invest on a monthly basis via SIPs (Systematic Investment Plan) thereby negating the need to invest in one go.
  • The portfolio assets are not invested in one place; the portfolios are kept diverse so as to minimise the risk of massive losses.
  • If you choose not to withdraw your investment, it will continue to grow and turn into a good amount of savings for a rainy day.
  • While you may not be able to withdraw the principal amount, you can withdraw the dividends earned, even during the lock-in period.
  • While other investment options come with a lock-in period of 6 to 15 years, these mutual funds feature a lock-in period of only 3 years.
  • Since these schemes are open-ended in nature, investments can be made all year round.
  • The funds are professionally managed by experienced fund managers having in-depth market knowledge. Thus, investors who don’t have any market knowledge can also invest in these funds.

Tax Saving Mutual Funds ELSS vs PPF vs FD

Particulars ELSS PPF FD

Investment Eligibility

Any Individual Taxpayer including NRI’s

Resident Indian individuals

Any Individual Taxpayer including NRI’s and HUF

Investment Amount

Rs.500 up to No Limit

Rs.500 up to Rs.1.5 lakh

Rs.100 to up to Rs.1.5 lakh

Lock-in-Period

3 years

15 years

5 years

Tax on Returns

Tax-free

Tax-free

Taxable

Expected Returns

10% to 15% (market-related)

No Return

No Return

Investment Option

Medium to Long Term

Long Term

Medium to Long Term

Loan Facility

Partial loan after completion of 3 years

Loan available after completion of 3 years

No loan available

Risk Factor

Risk associated

No Risk

No Risk

Tax Saving Benefit

Rs.1.5 lakh as specified under Section 80C of Income Tax Act, 1961

Rs.1.5 lakh as specified under Section 80C of Income Tax Act, 1961

Rs.1.5 lakh as specified under Section 80C of Income Tax Act, 1961

Top 10 Tax Saving Mutual Funds in India

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

  1. IDFC Tax Advantage (ELSS) Fund: The IDFC Tax Advantage (ELSS) Fund is an open-ended equity-linked savings scheme offered by IDFC Mutual Fund which chiefly invests in equity and equity related instruments to offer long-term capital appreciation. It aims to create a diversified portfolio consisting of stocks of firms that have strong fundamentals and are valued reasonably. It also invests some of its portfolio corpus in money market and debt securities. This fund features a 3-year statutory lock-in period. It was launched in December 2008 and is managed by Mr. Daylynn Pinto.
  2. Tata India Tax Saving Fund: The Tata India Tax Saving Fund is an open-ended equity-linked savings scheme offered by Tata Mutual Fund. It invests the maximum portion of its portfolio assets in equity-related instruments of trusted companies with an aim of generating long-term capital growth while also offering tax benefits under Section 80C of the Income Tax Act, 1961. The investment is this scheme will be locked for a statutory period of 3 years. The fund was launched in March 1996 and is managed by Mr. Rupesh Patel.
  3. L&T Tax Advantage Fund: The L&T Tax Advantage Fund is an open-ended equity-linked savings scheme offered by L&T Mutual Fund. The prime motto of the fund is to generate capital growth in the long term for the investors via investments done in a diversified portfolio mainly consisting equity and equity-related securities in addition to other money market instruments. It comes with a statutory lock-in period of 3 years. The fund was launched in February 2006 and is managed by Mr. Soumendra Nath Lahiri.
  4. Aditya Birla Sun Life Tax Relief 96 Fund: The Aditya Birla Sun Life Tax Relief 96 Fund is an open-ended equity-linked savings scheme offered by Birla Sun Life Mutual Fund. The investment objective of this fund coming with a 3-years statutory lock-in period is to derive capital growth for the investors in the long term by making investments chiefly in a diverse portfolio of equity and its related securities. It also contributes some part of its corpus in money market and debt instruments. The scheme was converted to an open-ended scheme on March 1996 and is currently managed by Mr. Ajay Garg.
  5. Aditya Birla Sun Life Tax Plan Growth: The Aditya Birla Sun Life Tax Plan Fund is an open-ended equity-linked savings scheme offered by Birla Sun Life Mutual Fund which offers tax deduction benefits under Section 80C of Income Tax Act 1961. It strives to generate long-term capital growth for the investors through predominantly investing in equity & equity related securities. This tax-saving scheme follows a bottom-up approach towards investing and comes with a statutory lock-in period of 3 years. It was launched in February 1999 and is managed by Mr. Ajay Garg.
  6. DSP BlackRock Tax Saver Fund: The DSP BlackRock Tax Saver Fund is an open-ended equity-linked savings scheme offered by DSP BlackRock Mutual Fund. It enables the investors to enjoy double benefit of long-term wealth creation as well as tax deduction from their total income as allowed under the Income Tax Act, 1961. It aims at generating capital appreciation over a medium to long period via investment done in a diversified portfolio of equity and equity-linked instruments of corporates. The fund was launched in January 2007 and is managed by Mr. Rohit Singhania.
  7. Axis Long Term Equity Fund: The Axis Long Term Equity Fund is an open-ended equity-linked savings scheme offered by Axis Mutual Fund. It offers tax benefits to the investors up to the limits specified under Section 80C of the Income Tax Act, 1961 and comes with a statutory lock-in period of 3 years. The main objective of this fund is to yield capital growth by making investments mainly in equity and equity-related instruments of companies. The fund was launched in January 2016 and is currently managed by Mr. Jinesh Gopani.
  8. Kotak Tax Saver Fund: The Kotak Tax Saver fund is an open-ended equity-linked savings scheme offered by Kotak Mahindra Mutual Fund featuring a statutory lock-in period of 3 years. The aim of the scheme is to generate capital appreciation for the subscribers over a long-term investment horizon through investing in a diversified portfolio comprising of equity and equity-related securities. The capital gains and dividend income under this scheme is completely tax-free. The fund was launched in November 2005 and is managed by Mr. Harsha Upadhyaya.
  9. Invesco India Tax Plan Fund: The Invesco India Tax Plan Fund is an open-ended equity-linked savings scheme offered by Invesco Mutual Fund. The main target of this scheme is to offer capital growth to the investors over a long-term through investments made in a diversified portfolio chiefly consisting of equity and equity-related securities of midcap companies. The fund invests across market capitalisation sectors by using the bottom-up approach. The number of stocks that the fund can invest in is limited to 20 - 50. The fund was launched in December 2006 and is managed by Mr. Amit Ganatra.
  10. HDFC Tax Saver Fund: The HDFC Tax Saver Fund is an open-ended equity-linked savings scheme offered by HDFC Mutual Fund. The investments made in this fund remain locked for a statutory lock-period of 3 years. The fund predominantly make investments in a balanced portfolio of equity and equity-linked securities of mid cap and large cap companies with an objective of yielding capital appreciation for the investors over a long investment horizon. The fund was launched in March 1996 and is managed by two experienced fund managers namely Mr. Vinay. R. Kulkarni and Mr. Rakesh Vyas.

FAQ’s about Tax Saving Mutual Funds

  1. How should I make payments towards mutual funds?
  2. Payments towards mutual funds can either be made by cheque or by direct debit. The most convenient option, if you have opted for an SIP, is to go for the direct debit option wherein the mutual fund provider will directly debit the SIP amount from your account every month once you allow permission for the MF provider to do so.

  3. When should I pay for my SIP?
  4. When you apply for an SIP with a particular fund house you will be informed about the dates when the payment is required to be done. You can choose any one of the dates for making a payment as per your convenience. For example, if you have invested in the ICICI Mutual Fund, you will be able to make the payments either on the 1st of the month, on the 10th of the month, or towards the end of the month.

  5. Is there a minimum investment requirement for ELSS?
  6. Yes, there is a minimum investment requirement for ELSS. Though the minimum investment amount depends on the mutual fund provider, generally, it is around Rs.5,000.

  7. What is NAV or Net Asset Value of a fund?
  8. NAV or Net Asset Value of a mutual fund is the price of each unit of the fund on a particular day. When an investor submits a withdrawal request with a fund house, the number of units available for withdrawal are multiplied by the applicable NAV price of the units and the resulting amount is credited to the investor’s account.

  9. How is NAV calculated?
  10. The NAV of each unit of a fund is calculated by subtracting the liabilities from the total asset value and dividing it by the number of the units that are outstanding on the day of valuation.

  11. The amount that I got was less than what the NAV promised when I checked the statement. How is that possible?
  12. The NAV of a fund can change every day. Therefore, when a request for withdrawal is made by the subscribers, the NAV taken into consideration is that of the day when the request is processed and not of the date when the statement is issued.

  13. Does a high NAV mean the fund is good?
  14. No. A high NAV does not necessarily mean that the fund is a good one. A reliable way to figure out whether a fund is a good one or not is to see the history of the returns that the fund has provided in past. Apart from checking the past track record of a fund, you can also check its rating with credit rating companies like CRISIL.

  15. Should I invest in an ELSS in lump sum or in instalments?
  16. Since both of these investment options are provided by mutual funds, it completely depends on your convenience whether you want to go for a lump sum investment or want to pay in instalments. The advantage of investing in an ELSS through monthly instalments is that the risk of loss on the entire investment amount due to market fluctuations can be avoided.

  17. What is the maximum amount that can be invested in these funds?
  18. There is no upper limit on how much can be invested in these funds. It is completely up to the investors to decide how much they want to invest in a fund.

  19. What is the maximum amount that can be withdrawn?
  20. The maximum amount that can be withdrawn is determined by the NAV and the number of units that are available under the scheme.

  21. What is the minimum amount that can be withdrawn?
  22. The minimum withdrawal amount is generally around Rs.1,000. However, the amount may change from company to company.

  23. If I invest Rs.2 lakh in a tax saving mutual fund in a year, can I claim tax benefits for the entire investment?
  24. No. You can claim income tax benefits only up to Rs.1 lakh to Rs.1.5 lakh in an equity-linked savings scheme or ELSS.

  25. How much tax will I have to pay on my long-term capital gain?
  26. Long term capital gains from ELSS funds are exempt from taxes. In fact, this the biggest advantage of investing in such tax saving mutual funds.

  27. Can I switch from one fund to another?
  28. Yes, while investing in an ELSS you will have the flexibility to switch between funds. However, only a part of the investment can be switched out and not the entire amount.

  29. How do I know where the money is being invested?
  30. If you want to know exactly how your money is invested in an ELSS, you can ask for the portfolio of that scheme as that will contain a detailed breakup of what is invested where. The portfolios of the schemes are also available on the company’s official website.

  31. Can I withdraw my investment during the lock-in period?
  32. No, you can’t withdraw your investment during the lock-in period. Once an investment is made in an ELSS, it cannot be withdrawn till the lock-in period is over.

  33. Can an NRI invest in ELSS?
  34. Yes, NRIs can also invest in tax saving mutual funds like ELSS.

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